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And the Winner Is...

SAN FRANCISCO -- Tough day to preach patience as the Dow Jones Industrial Average rose 0.9%, the S&P 500 gained 1.4% and the Nasdaq Composite rose 3.2%. If yesterday's failure by the Nasdaq to close above 2700 was significant, then so too must be today's surmounting of that level.

I don't have much else to add, as various engagements took me away from the action for much of the day. But I refer you to comments elsewhere on the site about the positive effect options expiration may have had on the session.

And the Winner Is

The grand ballroom of The Palace, a resplendent pre-1906 quake hotel, is packed with the best and brightest on Wall Street, members of the financial press and various "hangers on." There's a tangible buzz in the room. It feels like the first time. Like it never will again ... never again.

The stage is set, the band starts playing. Suddenly, your heart is pounding, wishing secretly you'd be named Guru of the Year, or at least, know the winner. So without further ado, GuruVision is pleased to announced that the Guru of the Year (or GOTY) for 2000 is: Thomas McManus, equity portfolio strategist at Banc of America Securities.

That's bound to be a surprising choice, judging by the slim tally McManus received in our poll. But GuruVision likes to go against the herd, and McManus demonstrated a keen ability to think independently in 2000. Surely he wasn't perfect (who is?), but the track record is pretty impressive.

Early in 2000, McManus said the rally by previously out-of-favor groups such as consumer staples, financials, drug stocks and utilities was not due to "seasonal" factors and forecast it would continue.

On Feb. 2 he lowered the equity portion of his recommended allocation to 75% from 80% and upped the fixed-income quotient to 25% from 20%. McManus kept cutting stocks and raising bonds throughout 2000 until arriving at his current recommended allocation of 60% stocks, 35% bonds and 5% cash. (Note, he was at 80% heading into 2000 and had adopted that "fully invested" posture in May 1999.) At the time, he recommended stocks that proved to be big winners, including Dominion Resources (D) and Warner Lambert, which would be acquired by Pfizer (PFE). (Procter & Gamble (PG) didn't work out so well.)

On April 24, the strategist warned that weakness in "second-tier" tech plays increased the risk that "technology blue-chips" -- such as Microsoft (MSFT), Sun Microsystems (SUNW), Cisco (CSCO), Yahoo! (YHOO) and Oracle (ORCL) -- "become increasingly overvalued and overowned." Since April 24, those names are down between 12% and 70%.

On Oct. 10, when it was becoming quite fashionable to talk fervently about bottoms, McManus resisted the trend. Later that month, he theorized that tech stocks had perhaps bottomed (oops) but maintained a defensive outlook. He suggested "it won't be a complete, reliable, viable bottom until we see more in the way of traditional signs of liquidation," meaning outflows from mutual funds -- view he reiterated on Nov. 7.

Forecasting that the S&P could break 1300 and the Comp 2600, McManus kept up the "no bottom" talk on Nov. 13, and again on Dec. 1. He also stated raising concerns about earning estimates being too high (something he continued to fret about heading into the current reporting season).

Finally, on Dec. 18, McManus theorized that tech investors were "still in denial despite recent woes" and reiterated overweight recommendations for utilities/energy, health care, consumer nondurables and (to a lesser extent) financials.

Looking Ahead

As 2001 began, McManus declared "it's hard to make the point this is the beginning of a major buying opportunity" in a conference call on Jan. 2. He also forecast that the Nasdaq could fall below 2000 and the S&P 500 test 1200 in the first half of the year.

Banc of America's "fresh money focus list: 10 stocks to buy now," compiled by McManus and director of portfolio strategy John Skeen, reflects the strategists' continued defensive posture. The list consists of the following: ACE (ACL), ALZA (AZA), Cardinal Health (CAH), Clorox (CLX), Constellation Energy (CEG), Fannie Mae (FNM), Freddie Mac (FRE), Kimberly-Clark (KMB), Reliant Energy (REI) and Southern Co. (SO). (BofA has done underwriting for ACE.)

The "fresh money buy list" was chock full of tech stocks at the beginning of 2000 but grew steadily more defensive and ended up rising 23% for the year, according to the firm.

In an interview this week, McManus said the Fed's federalreserve decision to ease Jan. 3 had not altered his outlook.

Again eschewing the popular mindset, McManus said the end of Fed easing cycles are "much more significant" than the beginning. It will be positive for equities if the Fed finishes easing sooner than anticipated because it means the economy -- and thus the environment for earnings -- will have improved as well, he said.

But it's "quite possible" the Fed will have to ease aggressively this year and bring the fed funds rate fedfundsrate below 1998 levels of 4.75%, McManus said, because the economy, and thus "the environment for earnings [now] is worse than in 1998."

Unlike Don Hays of Hays Advisory Group, for example, McManus believes Fed rate cuts will have a salutary effect on the economy by the second half of 2001, and thus feels a full-blown economic recession is avoidable.

McManus also goes against the grain by declaring the "cash mountain" in money market funds is "a mirage" and unlikely to "come into stocks and push us a lot higher."

The huge inflows into money market funds for the week ended Jan. 10 was most likely in anticipation of this week's estimated tax-filing deadline, he said, adding that all money market funds aren't necessarily earmarked for equity investments. More especially if fundamentals don't warrant such investments. (Bullish gurus have been touting the panacea of cash on the sidelines for months, McManus noted.)

McManus also remains wary about the outlook for stocks because of the prospect for continued weakness in the dollar vs. the euro. The advent of the euro in January 1999 forced European institutions to diversify abroad to hedge their currency risk, he explained. The euro's near-unabated weakness from inception until very recently exacerbated the trend. With Japan's economy in disarray, the U.S. was the prime beneficiary. If the euro continues to strengthen, that "fuel" for the market will abate.

Of course, the action so far in January seems to indicate that being named GOTY is akin to being named Time's "Man of the Year." But McManus is unfazed by the early returns.

"I don't want to put too much weight in action in the first weeks of a year," he said, equating seasonal factors to expiration sessions. There is "an opportunity for people to utilize enhanced liquidity in the market to move larges trades through the market," he said.

These movements "may be so large as to give people the mistaken impression of the fundamental behavior of stocks," McManus said. "The new year has given bargain hunters an opportunity to buy beaten-down groups and sell some that have done better. But the fundamental trends still favor overweighting stocks that did well in 2000."

For insight into the methodology used to determine the GOTY and why some others weren't chosen, click here.

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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