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Gurus: The Message Is Clear, but Is the Vision?

SAN FRANCISCO -- Warren Buffett is not an idiot. The Oracle of Omaha has been ridiculed in recent years for not "getting" tech, but his investing style is looking awfully smart again after recent market action.

Buffett's rediscovered genius seemed even more keen Monday as unsexy stocks such as Kroger's (KR), Willamette (WLL - Get Report), and American Freightways (AFWY) flourished, the latter two inspired by buyout developments. Meanwhile, growth names struggled again after Hewlett-Packard (HWP) became the latest in the group to produce lackluster or disappointing results.

Once as low as 10,369.74, the Dow Jones Industrial Average closed off 0.8% to 10,517.25. Similarly, the S&P 500 shed 1.1% to 1351.26 after trading as low as 1328.55. The Nasdaq Composite Index also bounced off its intraday low at 2859.39, but still closed down 2.1% to 2966.72, its first close below 3000 since Nov. 2, 1999.

For those with short memories, note the averages produced a similar performance just last Thursday . More important than the market's proclivity for impersonating a phoenix, recall the significance that's been placed on the Comp's ability to hold above 3000 repeatedly in recent weeks. That level cracked Monday, suggesting more weakness to come -- the next major support for the index being its October 1999 lows of 2632.01, according to Ralph Acampora, Prudential Securities chief technical analyst.

I'd feel better about the market having reached some kind of sustainable bottom Monday if there'd been more capitulation from the gurus who've emerged to take Acampora's place in the upper terraces of gurudom.

Instead, the vast majority of gurus remain prostrate before the growth-stock altar (as do readers, judging by the emails). It's hard to blame them, given the salvation growth stocks have delivered in recent years.

Each, and in their own special way, Joe Battipaglia at Gruntal, Thomas Galvin at Credit Suisse First Boston, Jeffrey Applegate at Lehman Brothers, Christine Callies at Merrill Lynch and Robert Robbins at Robinson-Humphrey, said essentially the same thing this week: While the election uncertainty might be creating some distress ( you don't say) and delay the post-October, postelection, year-end rally, the fundamental backdrop for equities remains favorable.

Ironically, the lone voice of dissent this week came from Greg Smith, chief investment strategist at Pru.

"We think that in this climate the basic strategy has to be defensive," Smith wrote, and his recommended allocation of 65% equities and 35% cash reflects that view. Within equities, Smith on Monday recommended reducing the allocation in technology to 21% from 25%, adding 2% each to consumer nondurables and health care.

I was unable to reach Smith to further discuss the changes. Similarly, I couldn't reach any of the other aforementioned gurus to ask them what -- if anything -- would make them turn negative on stocks in general or growth stocks in particular when nothing to date has turned the trick.

I did, however, catch up with Thomas McManus, equity portfolio strategist at Banc of America Securities, who remains cautious and has long cautioned against bottom-picking in this environment.

"My sense is the news flow on earnings is going to continue to be negative for several quarters," McManus said. "The question is: When is that fully built in?"

Acknowledging studies that show stocks do better when earnings are bad because the stocks start to anticipate a turnaround, McManus contends, "Now is the time when earnings are [still] good," suggesting the worst results might not emerge until the first or possibly second quarter of 2001.

Earnings growth for the S&P 500 might be flat in the first quarter of 2001, McManus forecast. The current consensus is for 10.9% growth, which, as reported Friday , already represents a decline in expectations.

Because of that risk to both earnings and expectations, McManus believes the S&P could break 1300 and the Comp retest its October 1999 lows around 2600. The strategist thus recommends a "modest underweight" in U.S. stocks and within equities, an overweight in "economically insensitive" groups such as health care, where favorites include Cardinal Health (CAH) and Alza (AZA). (Banc of America has provided investment banking or other services to Cardinal Health in the past three years.) Similarly, he recommends financials Freddie Mac (FRE) and Fannie Mae (FNM), consumer nondurables such as Kimberly-Clark (KMB) and Avon (AVP), plus energy/utility names Reliant Energy (REI), Southern Energy (SOE) and Constellation Energy (CEG).

Ray of Light

Sam Ginzburg, senior managing director of equity trading at Gruntal, is currently "shorting into strength [in tech]. Until we lose, that's our strategy."

But the trader acknowledges the possibility for a sharp, steep rally in the coming days and weeks because of the heavy amounts of cash on the proverbial sideline. Money market assets rose $21 billion for the week ended Nov. 8 and now total $1.8 trillion -- an 11.7% annual increase, according to the Investment Company Institute.

Ginzburg sees three potential developments that could inspire buyers. One, a resolution of the election uncertainty, regardless of the winner. Second, the Federal Reserve adopting a neutral bias at its policy meeting this week. Third, some positive development -- like a ceasefire -- in the Middle East.

The bad news is only the first of those three seems a realistic possibility. Worse, an election resolution seems less assured Monday after former Secretary of State and current Gore adviser Warren Christopher said the Gore campaign has joined a legal challenge of Florida Secretary of State Katherine Harris' refusal to extend the recount beyond the original deadline of 5 p.m. EST Tuesday.

Of course, Christopher's announcement of this latest twist put a quick halt to the market's afternoon rally attempt on Monday.

Step One: Remove Bushel

Elsewhere, biotech and genomics stocks plummeted for no apparent fundamental reason -- the Amex Biotech Index falling 11.1%, suggesting its recent ascent may indeed have been a case of bubble-itis.

"What you're seeing is exactly the same as in other sectors: In the absence of fundamentals, valuations get so overextended there can be -- and I hate to use the word -- a crash [when] people want to take money off the table before it's not there anymore," said Michael Shaoul, chief operating officer at Oscar Gruss & Son.

You could have read Shaoul's warnings about the potential biotech bubble in this column on Nov. 2 , or in this past weekend's edition of Barron's.

Aaron Task chats on MarketER on Wednesday Nov. 15 at 5 p.m. EST. Join the chat via the top of RealMoney.com's and TSC's homepage.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. 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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