A Sign of the End Times? - 06/07/10

		Update DHR

I am now more bullish than Jim Cramer.

Call me the Anti-Cramer again as I am now more bullish than Jim "El Capitan" Cramer, and any further drop in stock prices will bring me toward the polar opposite of my friend/buddy/pal.

Throughout the market's rally over the last six months, I have warned that too many were intoxicated by the price momentum and disregarded the shaky foundation of the world's economies (weak unemployment, a tepid housing market, etc.).

I thought it to be different this time and questioned the durability of the economic cycle, especially in the face of the due bills of fiscal stimulation and the long tail of the last credit cycle.

Most were complacent -- and there was no fear -- since the fall of 2009, even though I viewed the ratcheting up in economic growth as nothing more than a catch-up from a 12-month-long paralysis that was abetted by massive stimulus.

The market's rise was not necessarily the sign of a self-sustaining economic cycle, which was the cornerstone of the bullish market view that had many money managers and strategists eyeing the 1,300 level for the S&P 500 sometime during the year.

In my surprise list for 2010, I expected the market to be flat in the first quarter despite a better-than-expected profits picture, and to be down a high-single-digit percentage for the year. I anticipated a second-quarter Middle East conflict (similar to the flotilla incident), disappointing jobs growth and a weakening housing market would cause a market decline similar to the one we have now experienced.

That was then (stocks elevated); this is now (stocks marked down).

Today, even though the domestic economy is showing steady sequential improvement, coupled with a continued strength in corporate profits (and margins) and the Fed on hold indefinitely, the case for a cycle extension has become more compelling, though the slope of growth will be shallow by historic comparisons.

The recent sharp drop in stock prices has introduced fear into the investment equation as the eurozone's current crisis has paralyzed investors around the world.

From my perch, the pessimists are getting hyperbolic. Regardless, stocks have begun to discount the consequences of the last cycle and the actions that were required to get us out that cycle.

I view fear as the friend of the rational buyer -- here is Jim "El Capitan" Cramer's point-by-point response to my increasingly optimistic view -- and, as Danaher (DHR) recently remarked, the euro mess could have only a limited impact on many U.S. companies (even those of a multinational kind).

It should be emphasized that while I see emerging rays of sunshine, I take my raincoat to work every day.

While many stocks have gone on sale and valuation might be growing more attractive than at any point in the last six to nine months, I recognize the need to maintain a balance and to curb my enthusiasm, as there remains a more-than-usual amount of possible economic outcomes ahead. Moreover, forceful secular headwinds could have an increasingly powerful impact in 2011.

When I weigh the positives, the negatives and the uncertainties, my best guess is that the S&P 500 will be stuck in a relatively tight trading range of between 1,025 and 1,200 for the second half of 2010. This expectation, if realized, should provide opportunities on both the long and short side.

With valuations now compressed (at around only 12.5 times 2010 estimates), fear on the ascent and with the market currently residing near the lower end of my S&P expectations, I am a scale buyer, looking to increase my relatively low net long exposure (especially during further periods of weakness).