Market Pundits Walk Fine Line Between Hot and Has-Been

J.P. Morgan

-- the

Bill Gates

of the 1890s -- was constantly being asked about his expectations for the stock market. His standard response, "It will fluctuate," is still famous today because of what it implies: If a guy who's smart enough to become richer than most countries isn't sure where the market is going, then maybe it, like the rest of the future, is inherently unpredictable.

Most investors accept this in theory. But in practice, uncertainty is uncomfortable -- especially when it comes to money. So no matter how many times we get burned trying to time the market, we're always open to the next guru with a string of good calls. And we're always a little sad when a big, unexpected market move exposes our favorite pundits for what they are: Very smart humans who, like the rest of us, are stuck in the present without a functioning crystal ball.

My first brush with this syndrome was back in 1982 when a flamboyant technician named

Joseph Granville

built a following that let him move the markets with a press release. One of his sell recommendations sent the

Dow

down 28 points, the equivalent of 300 points today in percentage terms.

Unfortunately (for Granville), that was just before the

Reagan

bull market took off and everyone who sold missed one of history's great parties. For the ensuing decade, his newsletter came in dead last in

Hulbert's Financial Digest's

rankings of market letter returns.

Next came

Robert Prechter

, an "Elliot Wave theorist," who used an obscure theory of recurring cycles to make some great calls, culminating with a "sell" right before the crash of 1987. But he stayed mostly bearish as the markets recovered and gradually stopped making headlines. In 1996, he published

At the Crest of the Tidal Wave: A Forecast for the Great Bear Market

.

By the early 1990s, I was buy-and-hold all the way, a believer in the long-term magic of capitalism, but skeptical of anyone's ability to call the coming month or year.

Then came

Elaine Garzarelli

.

A

Shearson

strategist who parlayed a pre-'87 crash "sell" signal into a franchise, she would go on

Wall Street Week

and wow host

Louis Rukeyser

by weaving interest rates and money supply growth into predictions that defied current trends, but which turned out to be right on.

When she lost her Wall Street job over a disagreement about the market's direction (where she was, once again, right), she landed on her feet big-time, with a widely read stock newsletter. And when my father-in-law subscribed to the

Garzarelli Outlook

and promised to send over his old copies, I was ready to listen.

The first issue he forwarded had "Sell Your Stocks" in big letters at the top of the page. That was 1996; since then the market has boomed, Garzarelli's newsletter has folded, and she's fallen back into the pack, respected but no longer a market mover.

The lesson couldn't be much clearer. Or more universally ignored.

Which brings us to

Abby Cohen

, today's

uber

-pundit. As chief strategist for powerhouse

Goldman Sachs

(GS) - Get Report

, she'd be a big name no matter what. But Cohen has been optimistic -- and right -- for so long that

SmartMoney

now calls her "

Queen of the Bulls."

Last fall, when most of the world was talking global financial collapse, she said don't worry, be happy; Goldman's analysts are predicting higher corporate earnings, which justify rising stock prices. And she was right.

Earlier this year, when the

Fed

was poised to raise rates for the first time, she said no problem; it's like a flu shot, stopping inflation before it starts and stretching out the bull market. And by mid-August we were back in record territory.

Now, despite valuations that must have

Benjamin Graham

spinning in his grave, she's still guardedly optimistic. In an Aug. 2 report, she calls the market "fairly valued," and predicts annual gains in the high single digits going forward. No crash, not even a major correction.

If she's wrong, and higher interest rates, a weaker dollar and/or Y2K send stocks off a cliff, will we finally have learned to leave the future to the mystics?

Nah, we'll just find a new guru.

My dark horse nominee is

Don Hays

, chief strategist for

Wheat First Union

, the brokerage arm of super-regional bank

First Union

(FTU)

. Because his Nashville office is far from Wall Street, he's not generally mentioned in the same breath as the Cohens and Garzarellis. But if the market tanks in the next few months, he might be.

Back in the early 1990s, I wrote an article for a Virginia-based magazine in which I quoted Hays, mentioning that he was bullish on stocks. An editor, seeing this, said, "go ahead and quote him if you want, but remember the guy's a stopped clock. He's always bullish."

Now, bullish has been right in the '90s, so it's hard to fault him. But the real trick is calling the big turns. And this year, Hays took his shot.

His analysis goes like this: In 1998, the Fed responded to the "Asian Contagion" by flooding the system with money. This produced strong growth and surging stocks. But now that the crisis is past, the Fed has reversed course, sucking liquidity out of the system and slowing the economy. Since the Fed seldom moves interest rates just once (Hays calls Fed Chairman

Alan Greenspan

"Mr. Gradualism"), more increases are in store. When the markets realize this, look out. Hays calculates that the

S&P 500

is 30% overvalued vs. 10-year Treasuries. So either rates have to fall, or stocks do. In layman's terms: bonds good, stocks bad.

The other thing I like about Hays is that, unlike most of the other strategists who consider their market commentary proprietary (it took hours to track down a copy of Cohen's Aug. 2 report), he posts his daily comments at

www.wheatfirst.com for all to read -- and judge.

John Rubino, a former equity and bond analyst, writes a column on mutual funds for POV and is a frequent contributor to Individual Investor, Your Money and Consumers Digest. His first book, Main Street, Not Wall Street, was published by William Morrow in 1998. At time of publication, he had no position in any stocks mentioned. While Rubino cannot provide investment advice or recommendations, he invites your feedback at

rubinoja@yahoo.com.