For those tired of the seemingly endless cheerleading and ceaseless bullishness of Wall Street's punditry, please let me reintroduce you to Thomas McManus, equity portfolio strategist at Banc of America Securities. "To us, it appears that this correction still has the potential to wreak havoc among portfolios positioned to benefit from imminent economic recovery," McManus commented this morning. "The market's rosy consensus, projecting robust profits growth in the second half, is headed for a rude awakening, in our view." On the basis of, among other things, the recent weakening performance of cyclical stocks relative to consumer stocks, McManus believes "the stock market is building in overly optimistic expectations regarding the timing and the pace of the eventual economic recovery." (Since Dec. 6, the Morgan Stanley Consumer Index was up 3% heading into today's session, while the Morgan Stanley Cyclical Index was down 2%.) Given that view, the strategist maintains an overweight recommendation in consumer staples. He also believes bond yields are heading lower, which they were doing early today before bonds retreated and stocks improved. Meanwhile, equity averages were rallying at midday after struggling early amid revelations of an investigation into the accounting practices of Computer Associates ( CA), which was down 18.8%. Long before Enronitis reached epidemic proportions, McManus thought consensus earnings estimates were overly optimistic. He's forecasting flat earnings for the year vs. the current consensus of 15.2% growth for the S&P 500, according to Thomson/First Call. "With all the careful attention now being paid to avoid the appearance of accounting irregularities, Street estimates are likely to drift lower," the strategist predicted. A belief that both the economic rebound and earnings will prove weaker than expected leads McManus to the conclusion that "valuations are still too rich." Following yesterday's session, the median
price-to-earnings ratio on the Value Line indices was 18.5, he noted, down only slightly from the record levels of 20 reached in January. Meanwhile, the median dividend yield is only 1.9%, down from the 2.2% that prevailed in September, when McManus last raised his recommended equity allocation. Additionally, he noted the still-weak capacity utilization rates revealed in Friday's industrial production report. Overall capacity utilization fell to 74.2% in January, its lowest level since April 1983, from 74.4% in December. Meanwhile, utilization in the communications equipment sector reached a new low, while the semiconductor and related equipment hit its lowest level since 1975. "Low capacity utilization probably means little pricing power, and thus crimped profits," McManus concluded. At 55% stocks, 40% bonds and 5% cash, McManus maintains one of the most cautious recommended allocations of the so-called major Wall Street strategists. He maintains a rolling 12-month target of 1200 for the S&P 500. Last night's column about accounting issues sparked a great deal of email, for which I'm ever appreciative. Regarding the seriousness of accounting issues, many readers feel we've only scratched the surface and remain skittish about the market. But a near-equal number charge that short-sellers (and journalists who report their views) are creating at atmosphere of unwarranted hysteria. As is often the case, Ike Iossif, president of Aegean Capital in Chino Hills, Calif., offered a completely different viewpoint: "There is no point in trying to over-intellectualize why bull markets go up, they do not need any particular reason. They just go up, that's what bull markets do," he wrote. "By the same token, there is no point in trying to over-intellectualize why bear markets go down. They do not need any particular reason, they just go down, that's what bear markets do." Many pundits have embraced the idea that a new bull market began in late September and are "trying to figure out why it's going down," the hedge fund manager continued. But "maybe we are still in a bear market, and it is doing what bear markets do." In the ongoing search for levity in these trying times, that quote reminds me of the scene in Blazing Saddles where Harvey Korman's character unleashes his band of bandits with the admonition: "Now go do, that voodoo, that you do so well."