Midday Musings: Strolling Over to the Sunny Side of the Street

Given the market's malaise Tuesday morning, I'd be accused of piling on if I offered more bearish tidings. So to avoid that 15-yard penalty, here's something intended to be uplifting.

After nearly three months of being "mainly neutral" in the market, Tobias Levkovich, U.S. equity market strategist at Salomon Smith Barney, this morning announced he is "stepping up to a more bullish posture" as a "cyclical turn seems to be forthcoming."

Levkovich, who maintains a year-end target range of 1300 to 1350 for the S&P 500, admits there are risks associated with current earning estimates and the possibility of an energy shock due to geopolitical events. He also discussed how the "transition" from an environment of 20% to 25% returns in the late 1990s to one of more historically normal high single-digit gains will limit the market's upside potential, assuming -- of course -- we get back to that kind of normal environment.

But "things are beginning to look up" on the macroeconomic level, he commented, notably the upturn in new orders in the Institute for Supply Management's survey. That should translate into improvements on the micro (company) level in the coming months; "thus, we think investors will be rewarded by buying in now," he wrote.

The strategist eyed evidence of those micro-level improvements already occurring, including the following:

General Electric (GE) posted positive short cycle order growth number in December, the first increase in 13 months;

FedEx (FDX) recently said it is experiencing "robust business" in its ground delivery business

;

Wabash National (WNC) recently got a large trailer order and Greenbrier (GBX) recently got a major railcar order;

Applied Materials (AMAT) saw a slight increase in sequential orders;

Parker Hannifin (PH) showed "impressive gains" in North American industrial orders in March vs. a 31% decline in March 2001.

Levkovich also noted continued strength in retail sales and a survey from the National Federation of Independent Business showing an increase in hiring by small businesses in January.

Based on the above, the strategist raised industrials to overweight from market weight, lifted information technology to market weight from slight underweight, while remaining cautious on telecom equipment and Internet infrastructure stocks. He reduced consumer staples to slight underweight from market weight.

In terms of specific names, Levkovich added Analog Devices (ADI), Deere (DE), Continental Airlines (CAL), Canadian National Railway (CNI) and American Express (AXP) to Salomon's recommended list, while removing Colgate-Palmolive (CL).

Of the aforementioned, Salomon has done underwriting for Continental, Deere, and Parker Hannifin.

I suspect Levkovich believes he's being "contrarian" in making this bullish call (he wasn't available for additional comment), and he is -- relative to what's going on in the market itself. The problem is that he isn't exactly being a maverick when compared to his peer group.

Merrill Lynch chief U.S. strategist Richard Bernstein's monthly sell-side indicator -- which is based on the recommended allocation of Wall Street strategists -- rose to 69.1% in February from 68.5% in January.

"Wall Street strategists continue to believe that the current environment represents one of the best times to buy equities in the last 16 years, and remain unusually confident regarding the effectiveness of monetary and fiscal policy," wrote Bernstein, who is genuinely a contrarian with a recommended allocation of 50% stocks, 30% bonds and 20% cash. For purposes of comparison, Levkovich's recommendation is for 70% equities, 25% bonds and 5% cash.

The sell-side indicator comes out at the beginning of each month and if Levkovich's call and today's market action is any indication, it will show ever-increasing optimism in March. One thing that's become clear in the past few years is that the lower the market gets, the more optimistic Wall Street's strategists become.

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