A Bull Turns a Bit Bearish
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

First Katrina, then Rita, and as far as Wall Street goes, tropical storm Freddie could be next.
Freddie is named after the fella predicting the impending stock market storm. That’s Fred Dickson, the well-regarded chief investment strategist of D.A. Davidson & Company, a Northwest regional brokerage biggie out of Great Falls, Mont.
This storm is what Mr. Dickson sees occurring over the next four to five weeks, basically a bum third quarter, with stock prices dropping 5% by mid-October, spurred by a spate of third quarter earnings warnings.
What makes this forecast so intriguing is that Mr. Dickson, a former investment strategist at Goldman Sachs, is actually bullish on the market, though not over the short run.
“We’re in for a rash of unpleasant market weather soon,” he tells me. In fact, it has already started, he points out, noting that many companies have recently issued earnings warnings, in large measure a reflection of the devastation unleashed by Katrina. And in almost all cases, their stocks were whacked by brisk selling pressure.
One significant problem, as Mr. Dickson sees it, is that Wall Street analysts are far too optimistic in their third quarter earnings expectations. He thinks they’re short-changing the havoc Katrina wreaked on the Gulf Coast region, which, he notes, has to be a drag on earnings in many parts of the country; likewise, the impact it has had on a variety of industries, such as airline and rail transportation, hotels and resorts, retailing and the production of chemicals. As for individual names, he points to such impacted companies as Marriott, Harrah’s Entertainment, and Delta Air Lines.
Katrina notwithstanding, analysts, he says, expect the current quarter’s S &P 500 operating earnings to rise 15%, up from a 12% advance in the June quarter. Given Katrina, Mr. Dickson feels a current quarterly earnings gain of 6% to 8% is a much more realistic expectation.
Aside from his outlook for bum thirdquarter earnings tidings, our strategist is also bothered by the recent rise in the price of gold to a 17-year high. Such a spike, he points out, is normally a harbinger of higher long-term interest rates due to rising inflationary concerns. “Gold (which closed 2004 at $438.45 an ounce and traded in recent days at more than $475) looks like it’s going to remain high, signaling,” Mr. Dickson believes, “a problem that the market is not yet addressing.”
After what he describes as “the third-quarter earnings debris,” Mr. Dickson sees a market rally, which, he believes, will push the Dow north of 11,000 by year’s end, versus yesterday’s close of 10,422.05.
That predicted rebound reflects his expectations of sustained economic growth, spearheaded, in part, by the rebuilding of the Gulf Coast. He expects next year to produce a GDP gain of 3.5% and an operating earnings rise for the S &P 500 of 8% to 10%. This compares with his projected 2005 GDP and earnings increases of 3.4% and 10%, respectively.
As for the 2006 stock market, he sees “a positive year, better than 2005.” On a cautionary note, though, he points to such obvious risks as the prospects of even higher oil prices and inflation worries.
Which are the best stock plays for the year ahead? Despite their big gains, Mr. Dickson favors oil refiners (namely Valero energy), natural gas companies (Burlington Resources), and the engineering and construction sector (Chicago Bridge & Iron and Fluor Corporation). Given a decent market, Mr. Dickson believes each of these four stocks has appreciation potential in excess of 15% over the next 12 months.
He also thinks an investment in gold makes sense at this juncture and especially favors StreetTracks Gold Shares, an exchange traded fund that moves up and down in conjunction with the fluctuations in the gold price and trades on the Big Board under the symbol GLD.