Bears Will Pull Santa’s Sleigh This Year

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Some biting words from Leonard Hahnne, an unhappy reader.”Dan, considering the mindset of a number of people you interview, you might want to think about a special feature for your column. I would call it Idiots Corner, a good placement for all those crazy alarmists you love to quote. I would include in this camp the guy you interviewed last Friday, who says we’re in for a severe economic recession and a bear market in equities. You can tell by the way the market keeps going up and up that this is someone really knows what he’s talking about.

“Why not stick with sane people, like that guy from Montana you wrote about. I think his first name was Fred. He comes across as real smart, and I made money on two of his stock picks. I bet he doesn’t agree with your bear, who says we’re in for a down market the rest of the year. I would also be interested in Fred’s fourth quarter outlook and his best stock ideas.”

For starters Leonard, that bear you refer to, James Melcher, who runs the $200 million hedge fund, Balestra Capital, has far outperformed the general market the past seven years. Likewise, he’s made some uncanny investment decisions, such as correctly buying and selling before significant up and down moves in the American, Asia and Russian markets, as well as in bonds. So while he may be a bear, he’s by no means a dumb bear.

You’re right about Fred, who doesn’t share Mr. Melcher’s bleak outlook, though he does have a number of concerns.That’s Fred Dickson, who is paid to dole out investment advice to the clients of D.A. Davidson & Co.,a regional brokerage biggie out of Great Falls, Mont. Mr. Dickson, the firm’s chief investment strategist and a former strategist at Goldman Sachs, expects a modest fourth-quarter rally, a slow drift up, he says, of about 2% to 3% a month, with the Dow winding up the year at around 12,000.

That projected 2% to 3% fourth-quarter monthly gain is in line with the general final quarter showing, which in the past 18 years has averaged an annual advance of 6.94%.

“I think Santa will be seen on Wall Street this year, but instead of three bags of goodies, maybe just one bag,” Mr. Dickson says.

His expected arrival of a more frugal Santa is based on a number of concerns, which, he notes, has led many Davidson clients to rebuild their cash reserves.

His major one is the slumping housing market and how consumers see it impacting their wealth. Yet another worry, he says, is the endgame in the Middle East, namely what will the fighting cost and how many more lives will be lost?

Then, too, he adds, are the widespread worries about growing economic dangers, rising geopolitical tensions, the threat of tepid or dramatically lower earnings guidance from corporate America, and the possibility that business spending may be throttled up.

Likewise, he sees the market held back somewhat by slowing economic and earnings growth. Mr. Dickson’s forecasts call for fourth-quarter GDP to turn in an annual growth rate of 2.5% and earnings to advance 6%, versus estimated growth of 8% in the current quarter.

On the other hand, Mr. Dickson sees some significant market pluses. Most noteworthy, the Fed, given no interest rate increases at its last two meetings, has essentially removed itself as a market head wind. Ditto, moderating inflation fears and the dramatic drop in the price of gas, which has taken pump prices off the table as a major issue. He also sees an economic “soft landing” in the year ahead.

As of now, Mr. Dickson thinks equity asset locations are generally too light, but he expects that to change as more buyers test the water in small increments. His recommended portfolio asset breakdown for clients is 65% stocks, 25% fixed income and 10% cash.

Here’s a rundown of his favorite sectors and his top pick in each:

• Global banks: J.P Morgan Chase & Co.

• Property casualty insurers: Allstate Corp.

• Application software: Oracle Corp.

• Internet Security: Symantec.

• Data hardware: EMC Corp.

• Generic drugs: Teva Pharmaceutical

Although many of these stocks are up a lot over the past year, Mr. Dickson still rates them all as market outperformers, with a lot more mileage, he feels, on the upside.

At the same time, he says he would shun certain sectors, notably housing, autos, and commodity metals, such as copper, aluminum, and gold.

Meanwhile, investors appear to be placing their bets with the bull, rather than the bear, what with just released numbers from liquidity tracker TrimTabs Investment Research of Santa Rosa, Calif., showing that investors are stepping up their purchases of equity mutual funds, an estimated $7.3 billion worth, in fact, over the past three weeks.

These purchases, as Mr. Dickson sees it, make sense, but he hastens to caution, “While Santa is coming, don’t expect the world.”


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