This Rosencrans Has Thorns: Market Blooms, but Strategist Offers Warning
Guruitis: We Just Can't Get Enough
Because of the market slide last year, a cautious approach was the common theme among other gurus brought to GuruVision's attention -- either by readers or the sources themselves -- for getting it right. Being that GuruVision has less of a track record with these folks than its regulars (who generally come from Wall Street's mainstream), bear with us as we attempt to separate the gurus from the chaff. Remember, inclusion in GuruVision does not necessarily indicate an endorsement; the idea is to give readers as many points of view as possible, and to hold the gurus accountable.
As 2001 unfolds, it will be interesting to see if last year's heroes are willing to change their views because, thus far, it's been better to have been on offense, vs. defense, in 2001. So it was again today, as the Dow Industrials rose 0.7%, the S&P 500 gained 1.3% and the Nasdaq gained 3%.Then again, the Minnesota Vikings will be watching the Super Bowl on Sunday (much to the chagrin of Dave Kansas) while the Baltimore Ravens will be participants. Investors would be wise to follow the Ravens' defensive-minded approach this year, according to Howard Rosencrans, director of research and senior security analyst at HD Brous & Co. Rosencrans adopted an "increasingly negative" stance beginning in mid-1999. That proved painfully wrong in late 1999/early 2000, he acknowledged, but he hasn't wavered from the view since (begging the flexibility question). Last year, Rosencrans predicted as much as a 50% decline for the Comp from its March high and unabashedly used the term crash during frequent appearances in bull-bear debates on various financial news programs. Heading into 2001, Rosencrans forecast the Nasdaq would rally to as high as 3000, perhaps higher, given expectations of economic recovery in the second half. But he believes major indices will trade "meaningfully lower" by year-end, forecasting the Dow at 8000 and the Comp at 2200. Recently, Rosencrans declared that tech stocks remain "comically overvalued," which is where GuruVision picked up the trail. The strategist noted the trailing 12-month price-to-earnings ratio of the Nasdaq Composite was about 54 at the lows of October 1998. This past December, despite about 10 months of near-ceaseless pain for tech stocks, the Comp's trailing P/E never fell below 81, he reported. Today it is around 94 times based on trailing earnings through November 2000. Similarly, Crosscurrents editor Alan Newman, with whom Rosencrans works closely at HD Brous, observed the average trailing P/E of "tech bellwethers" Applied Materials (AMAT), Cisco (CSCO), Intel (INTC) Oracle (ORCL), Microsoft (MSFT), Sun Microsystems (SUNW) and Qualcomm (QCOM) is currently around 45 times, well above their average low since 1995 of 29 times despite a collective slowing of earnings growth. Needless to say, those are all high by historical standards, and the HD Brous market watchers believe the "old rules" covering valuation still very much apply. Rosencrans' big concern is that earnings will not justify current valuations, predicting the expected rebound of earnings growth in the second half will not materialize, leading to continued lowering of expectations. Perhaps most surprising is Rosencrans' view that the overvaluation is worst in the presumably "safe, defensive Old Economy stocks." Rotation into groups such as cyclicals, foods and (broadly speaking) health care "created pronounced overvaluation," he said. Currently, Rosencrans believes the real opportunity is in small-cap names but that there's "more money to be made on the short side in the bulk of the marketplace." Specific short recommendations (and holdings) include AOL Time Warner (AOL), Cintas (CTAS), Symbol Technologies (SBL), and Idexx Laboratories (IDXX). He also sees risks in major brokerage houses and larger banks, notably those with investment banking arms. Rosencrans declined to specify financial shorts, but hinted they include some household names. If Rosencrans seems out of step with what's going on in the market today (notably, some financial giants hit 52-week highs today), consider his longer-term view that the oughts could prove to be analogous to Japan in the 1990s for the U.S. Such an environment would feature "sustained erosion in economic levels and consumer confidence," he warned. "You have not had any semblance of capitulation from an equity standpoint. [Last year] was just the tip of the iceberg." The strategist doesn't believe Federal Reserve rate cuts can provide anything more than "short-term stability," believing Alan Greenspan is "pushing on a string." GuruVision will keep a close watch on Rosencrans in the coming year to see if his view changes (and if he's capable of altering it). If the outlook proves correct, we'll all be in trouble. Look for additional features on gurus who got it right last year in this space. Market conditions allowing, tomorrow we'll review one market seer who has not only recanted the bearish view held in 2000, but also believes individual investors should be timing the market.
Walk the Thin LineAs I mentioned in RealMoney.com's Columnist Conversation today, there's an intriguing perception issue regarding sentiment these days. Depending on who you ask, everyone either loves or hates the market. Well, there's a reason for such diverse points of view, according to a quick look at two notable sentiment indicators. While the American Association of Individual Investors poll shows a modest 36.6% of individuals consider themselves bullish last week vs. 42.6% three weeks prior, the Investors Intelligence survey of newsletter writers was at 57% bullish, a high level by historical standards, vs. 52.9% three weeks ago. John Bollinger at BollingerBands.com in Manhattan Beach, Calif., explained the dichotomy as a situation where professional market watchers, dressed in wet suits, are advising investors to jump into the market in their birthday suits. Individuals who got hurt bitterly last year are "standing by the edge of the pool saying 'the water is cold. Only an idiot jumps in,' " he said. Bollinger believes investors should jump, but not into the big-cap growth favorites that have dominated in recent years and at the beginning of 2001. He reiterated a view that there's far more opportunity in small- and mid-cap stocks, noting the Value Line New Arithmetic Index rose back into record territory today, closing up 1.9% at 1212.16. "I don't think [individuals] hate the market but they're more interested in what they hope will go on in the market, and few are paying attention to what's really happening," he continued. "There are very few people getting on the right train." Is he right? Tell us what you think.
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