Dream no small dreams, the Old Testament says. In the case of every investor’s dream – a spirited and lasting holiday rally – it’s nothing more than a pipe dream, some professionals will tell you.

The chief worries of the skeptics are hardly a secret – notably the question of whether the economy and corporate earnings can sustain their momentum next year; a plunging greenback; no end in sight to the Iraqi mess, which could easily worsen next month when the country is scheduled to hold national elections; and rising interest rates. Likewise, there’s the uncertain course of oil, a swelling budget deficit, turmoil in the Middle East, and the ongoing threat of terrorism.

But wait, all is not lost. There is a Santa Claus – in the person of David Rosenberg, Merrill Lynch’s chief North American economist. Santa Rosenberg is currently making the Wall Street rounds with a bagful of holiday cheer. Basically, he’s alerting Merrill’s clients to 10 reasons why he believes that investors should remain cheerful during the Christmas season.

Factoring in updated numbers, here’s his bundle of cheer, or essentially the fuel for what might produce a healthy holiday rally and prove the worrywarts are all wet:

1. Investors arguably have the most pro-market and pro-business agenda on tap in the White House since the Reagan era.

2. According to Merrill’s latest global fund-manager survey, liquidity levels remain high, with cash reserves on the rise. Further, the survey showed a net 13% of institutional investors are overweight in cash. What’s more, the latest Commodity Futures Trading Commission report shows that hedge funds are short (a bet on falling prices) more than 10,000 contracts on the S&P 500 in a sign of healthy skepticism in the rally (usually a bullish contrary indicator).

3. Oil prices are down about 21% from their October high. If the National Weather Service is correct in its forecast that we’re in for another week of balmy fall weather, we could see some further near-term relief (on the price front). Moreover, if oil, as some suspect, settles somewhere in the low $30s next year, then we are talking of a second half GDP bounce in 2005.

4. The economic data have stopped coming in below consensus expectations, and we are now seeing upward revisions to prior numbers (as in non-farm payrolls and retail sales). It now looks like we’ll see GDP growth of 3% to 3.5% in the fourth quarter, which is nirvana (not too cold/not too hot) for the equity market.

5. The University of Michigan consumer sentiment index showed a 3.8% pop in November, and Deloitte & Touche’s annual survey of 16,0000 households found consumer spending intentions in the fourth quarter to be up 5% to 6% above year-earlier levels, well ahead of the consensus’ expected range of 3% to 4%.

6. The Federal Reserve has said that inflation and inflation expectations remain well contained, which is a very constructive statement for long-duration assets.We believe that the Fed will remain on the sidelines (meaning no more interest rate hikes) for the rest of the year.

7. Indicative of the investor’s resumption of his love affair with stocks, the latest data show a $12 billion net inflow into equity mutual funds last week. It represents cash on the sidelines being put to work because the flows came out of money market funds, which posted a $6.6 billion net redemption.

8. The trend in stock buybacks is accelerating, which is helping to put a floor under the market. So far this year, they have totaled $22.7 billion, the highest level in at least 17 years.

9. Dividend payments are on the rise, which is also helping to put a floor under the market. So far this year, 223 companies have boosted their dividend payouts, versus 208 last year. Microsoft’s $30 billion-plus special dividend is widely seen as providing the market with a potentially large source of liquidity when the proceeds are sent out early this month.

10. We don’t know why the renewed softening of the greenback is being greeted with so much angst in the press. As long as it doesn’t destabilize the interest rate landscape, the drop in the dollar is constructive for equities, given the positive top-line impact for currency translation effects on foreign based American company earnings.

A word of caution: The 10 positive reasons, to varying degrees, are said to have a shelf life of around three months. In terms of what to expect throughout 2005, the keys, observes Mr. Rosenberg, are how fast earnings growth recedes, and to what extent the Fed drains liquidity.