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GuruVision: Tuning In to the Bull

Aaron Task

SAN FRANCISCO -- What if the Federal Reserve hadn't cut rates last week? Investors would be forgiven for asking the question after a third straight session of post-ease blues today. Still, stocks rallied sharply toward the close, leaving the Dow Jones Industrial Average down 0.4% to 10,621.35 vs. an intraday low of 10,516.02. The S&P 500 fell 0.2% to 1295.86 after trading as low as 1276.31, while the Nasdaq Composite dipped 0.5% to 2395.92 vs. an intraday low just below 2300.

Before the final 30 minutes (or so), today looked and smelled much like the second half of 2000, as defensive groups such as utilities as well as energy stocks were the best performers. Furthermore, the majority of stocks rose on the New York Stock Exchange, where advancers bested decliners 16 to 13 and new 52-week highs outpaced new lows 182 to 15.

Losers bested winners 11 to 8 and new lows topped new highs 142 to 54 in Nasdaq trading, as erstwhile growth favorites such as BEA Systems (BEAS Quote - Cramer on BEAS - Stock Picks) and Protein Design Labs (PDLI Quote - Cramer on PDLI - Stock Picks) suffered outsized losses.

The mood on Wall Street was best summed up by one fund manager, who shall remain nameless, who quipped: "You know you are seriously depressed as a portfolio manager when you consider a rally off the lows like today as a really good day."

Indeed, many market participants were encouraged that major averages closed well above the intraday lows hit Jan. 3 (levels at which the most hardened cynics say the Fed would again be compelled to lower rates).

"You could say it was reminiscent of a retest, but it doesn't mean anything yet," countered John Roque, vice president and senior analyst at Arnhold and S. Bleichroeder and RealMoney.com contributor. "Just because we're bouncing doesn't mean much to me."

Roque's main takeaway from trading since last Wednesday's tremendous gains is that "these one-day phenomena are not anything to believe. The just don't do it for us."

Contrarians might delight in such comments. But then they'd also have to consider the latest bout of guru optimism unleashed by the Fed's ease last week. The excitement is understandable, given "100% of the time following an initial discount rate cut since 1980, the market was higher a year later," as Robert Robbins, chief investment strategist at Robinson-Humphrey in Atlanta, observed. (James Cramer looked at the market's impressive track record since 1954 after the first cut in the fed funds rate.)

Given the Fed's easing was the basis for each of the gurus' bullishness this week, let's move ahead to what they're expecting next.

Robbins, for one, stood by his Dec. 21 "bottom" call, which occurred when the S&P 500 was at 1264. He predicted the S&P 500 will be a 1674 a year from now, a 25% rise when he penned the piece late last week, but 29% above today's close.

The strategist did not offer specific stock picks but recommended investors with "balanced" portfolios have 80% of assets in stocks, 15% in long-term bonds and 5% in cash. Within the equity quotient, he upped financials to 29% from 25% (vs. 17% in the S&P 500), and raised technology to 20% from 15% (vs. 27% in the S&P 500). He downgraded health care to 18% of the recommended stock allocation from 23% (vs. 13% in the S&P 500).

Over at Credit Suisse First Boston, Thomas Galvin writes that last week's performance has not shaken his optimism. He predicts 20% upside for the S&P 500 this year and offers five favorite stock picks for 2001: Nokia (NOK Quote - Cramer on NOK - Stock Picks), Applied Micro Circuits (AMCC Quote - Cramer on AMCC - Stock Picks), Celestica (CLS Quote - Cramer on CLS - Stock Picks), McLeod (MCLD Quote - Cramer on MCLD - Stock Picks) and Morgan Stanley Dean Witter (MWD Quote - Cramer on MWD - Stock Picks).

CSFB has done underwriting for Applied Micro, McLeod and Morgan Stanley Dean Witter.

Finally, in his homage to the Fed's rate cut, Galvin observes "that 600 basis points of potential Fed easing from current fed funds rate exist, meaning that a whole lot of love and liquidity remains in the medicine cabinet to assist the economy."

Galvin isn't predicting or wishing for 600 additional basis point of easing, which would bring the Fed funds rate to zero, but anyone familiar with the experience of Japan in the 1990s shudders at the very thought.

Elsewhere, Christine Callies, chief U.S. investment strategist at Merrill Lynch upgraded consumer cyclicals to overweight from market weight and downgraded utilities to neutral from overweight. Specific recommendations in the consumer space include Abercrombie & Fitch (ANF Quote - Cramer on ANF - Stock Picks), Talbots (TLB Quote - Cramer on TLB - Stock Picks), Kohl's (KSS Quote - Cramer on KSS - Stock Picks), RadioShack (RSH Quote - Cramer on RSH - Stock Picks) and Toll Brothers (TOL Quote - Cramer on TOL - Stock Picks).

Despite acknowledging the murky relationship between Fed easing and the tech cycle, the strategist suggested investors should nonetheless "buy the dips." She recommended Xilinx (XLNX Quote - Cramer on XLNX - Stock Picks), Texas Instruments (TXN Quote - Cramer on TXN - Stock Picks), Siebel Systems (SEBL Quote - Cramer on SEBL - Stock Picks), Sun Microsystems (SUNW Quote - Cramer on SUNW - Stock Picks) and Corning (GLW Quote - Cramer on GLW - Stock Picks).

Merrill Lynch was an underwriter for "the most recent offerings" from Kohl's and Sun Microsystems, according to the report. Information on whether Merrill has done underwriting for any of the other firms was "not readily available," according to the brokerage's compliance department.

Callies' conclusions included a belief major averages have already bottomed and that "to be bearish now essentially assumes that the Fed has already made a serious policy error. We see no evidence of this, and reiterate our recommendation to buy the dips."

What's vexing is that Callies (among many others) was continually recommending investors buy the many dips last fall. More troubling this time is the aforementioned comments are accompanied by an "adjustment" to her S&P 500 earning estimates. "Adjustment" being a euphemism for "lowering" as in to $57.84 a share for year 2000 from $58.44 previously, and to $60.20 for year 2001 from $63.69.

"Therefore, our 2001 objectives for the S&P 500 are lower to 1625 from 1720 to reflect that changed profit forecast," she wrote.

Callies, who was unavailable for additional comment, suggested a larger-than-expected expansion of price-to-earnings ratios -- in part because of additional Fed easing -- could result in the S&P landing somewhere between those estimates.

Either way, just remember to keep buying those dips.