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They're Bullish! Again! This Time It's for Real!

Aaron Task

As if Annie Oakley and Belle Starr were leading the cavalry charge, Abby Joseph Cohen and Christine Callies rode to the market's rescue today. Riding shotgun to the galloping gurus of Goldman Sachs and Merrill Lynch, respectively, was Edward Kerschner of UBS Warburg.

Positive comments from the threesome helped the Dow Jones Industrial Average rise 1.6%, the S&P 500 climb 2.4%, and the Nasdaq Composite jump 5.8%. Pent-up demand to buy stocks after their recent shellacking, the apparent indications of election resolution soon (?), and favorable dynamics of this Friday's options expiration (preponderance of in-the-money puts) also helped fuel the rally.

Cohen helped get the ball rolling with an early morning report in which she wrote "the fundamental picture remains favorable" and suggested the S&P 500 is 15% undervalued. "Today's markets are already priced for imperfection."

More significantly, perhaps, Cohen moved to a market weighting (35%) in technology and telecom, reversing an underweight recommendation adopted in March.

Later in the day, Callies announced she was increasing the equity component of her recommended allocation mix to 60% from 55%, taking cash down to 10% from 15% and leaving bonds unchanged at 30%.

"With moderately strong profit growth, stable interest rates, and ample liquidity likely to persist in 2001, equities are likely to outperform bonds and cash over at least the next three to six months," Callies wrote.

Elsewhere, "stock price weakness caused by election contention represents an attractive buying opportunity," Kerschner wrote, predicting a potential 15% appreciation in the S&P 500. Kerschner also reiterated a forecast the S&P 500 will hit 1715 by year-end 2001.

Gurus of Seville

As the rally progressed today, few market players were willing or able to split hairs about the gurus' calls. Now that the market is closed, let's break out the scissors.

First and foremost, you may recall (if not, let me remind you) that Cohen said the market's concerns about oil, the euro and earnings were "overdone" and its prospects "bright" back on Sept. 21. She also said the S&P 500 was 15% undervalued on Oct. 13. The day before those calls, the S&P 500 closed at 1451.34 and 1329.78, respectively. Yesterday, it closed at 1351.26.

You do the math.

Also, while Cohen's telecom and tech upgrade to market weight was significant, recall she made positive comments about tech back on Oct. 3, when the Comp was trading around 3500.

Today, she predicted the climb in oil prices will not end until the spring and acknowledged that economic and profit growth are slowing. While Cohen did not express alarm about the latter development, it does raise issue with the "perfect" environment Kerschner described.

The UBS Warburg strategist based his outlook partially on a belief profit growth will remain steady next year, forecasting 7% S&P 500 earnings growth for 2001 to $61.50, which is a hair below the current top-down First Call/Thomson Financial consensus of $62.29, or 7.8% growth. Kerschner leaves little room for the possibility other guru's estimates will continue to come down -- a trend you could have read about in this column Friday, or in today's Wall Street Journal.

As for Callies, on Oct. 4 she recommended investors begin "nibbling" on tech stocks because the Comp had breached 3600, which the index has not revisited since.

Furthermore, just yesterday (!) she published a report saying "the delay in [election] outcome increases the prospect of a 'soft' bottom in indices, and may slightly delay the fourth-quarter bounce."

I'm not sure what changed between yesterday and today, and Callies was unavailable to comment (as were Cohen and Kerschner).

Even regarding the prospects for election resolution, it's unclear we're any closer to closure than we were yesterday. A judge upheld today's 5 p.m. EST recount deadline, but also said Florida Secretary of State Katherine Harris cannot summarily dismiss hand recounts filed after the deadline. Meanwhile, the deadline for absentee ballots is Friday.

"Any money manager worth their salt is hard-pressed to make significant investment decisions with this situation as a backdrop," said Scott Bleier, chief strategist at Prime Charter. "It's not business as usual right now. Therefore, don't marry anything and be flexible. It's nice that we're up today [but] everything is a trade."

Finally, the legal wrangling between the campaigns continues. The Gore team adding Microsoft (MSFT - Cramer's Take - Stockpickr) slayer David Boies as a significant late-season "free" agent pickup suggests the end is far from in sight, much less the outcome clear.

And you say we got a resolution? Well, we're all doing what we can.

FedWatch 2000

Have to wonder how much of today's rally was fostered by investors' hope/expectation the Federal Reserve with adopt a neutral bias at its policy meeting tomorrow. Few economists expect such a change, given still high oil prices, tight labor markets and wage gains in the last employment report, as well as continued strong consumer spending/confidence, auto sales notwithstanding.

"The policy directive is in play but I feel they probably would not [go neutral] at this meeting," said David Jones, chief economist at Aubrey G. Lanston. "I just don't see the Fed yet starting to make fundamental policy decisions based on [the possibility of] a hard landing. They think it's a soft landing" for the economy.

Jones expects the Fed will go to an asymmetric bias at its December meeting or early next year as a prelude to a rate cut sometime in the second quarter of 2001. But that's a long way from Tipperary for those hoping Alan Greenspan will sound the bugle tomorrow for the second wave of the cavalry charge.

That's not to say the rally can't continue; it's just a reminder to take what the gurus say with a grain of salt. If we've learned anything this year, hopefully it's that the gurus are far from infallible.