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Wednesday March 7, 6:20 pm Eastern Time

SmartMoney.com - Pundit Watch

Abby Roars!

By Rebecca Thomas

ON WEDNESDAY MORNING, Goldman Sachs chief investment strategist Abby Joseph Cohen raised the equity allocation in her firm's model portfolio to 70% from 65% — just about as strong a message as a strategist can send that stocks are attractive.

The move reversed the call she made last March, when she reduced her equity allocation to 65% from 70%. That action, some say, contributed to the devastating decline that started in the Nasdaq Composite and spread to the broader market.

Will her latest call have an equally dramatic upside effect?

Everyone hopes so, of course, and Cohen is more influential than just about any other pundit. On Wednesday, stocks rose steadily on a day that was also littered with profit warnings. The Dow Jones Industrial Average rose 138 to 10729 and the S&P 500 index added eight points to 1261. The Nasdaq Composite gained 19 to close at 2223.

Cohen's enthusiasm was striking. ``We now believe that many of the imbalances identified during the course of 2000, in both the economy and the financial markets, have now been largely resolved,'' she wrote in a note to clients. ``Risk tolerance has been replaced by risk aversion. Moderate overvaluation of the S&P 500 has been followed by notable undervaluation. Margin debt has decreased and portfolio cash ratios have risen.'' On the flipside, Cohen reduced her recommended cash allocation to zero from 5%. (She still advises clients to hold 27% of their funds in fixed-income securities — especially intermediate-maturity bonds — and 3% in commodities.)

Among leading Wall Street firms, only Credit Suisse First Boston and Lehman Brothers still recommend a greater equity allocation. CSFB investment strategist Tom Galvin suggests that investors keep 90% of their money in stocks, while Lehman's Jeffrey Applegate advises an 80% equity allocation. By contrast, Banc of America and J.P. Morgan advise investors to continue holding cash and a significant amount of bonds. Their recommended equity allocation: just 60%.

While Cohen is shifting money around in Goldman's model portfolio, she's made no changes to her already optimistic 2001 forecasts for the S&P 500 and the Dow. For those indexes to meet her projections of 1650 and 13000, respectively, the S&P 500 would have to gain 32% from current levels and the Dow would need to add 22%. That might seem far-fetched to some, given the current state of the economy and the financial markets, but the unyielding bull insists that equities are as undervalued today as they were overvalued a year ago. And while noting that risks remain, she believes they are ``mainly of time,'' rather than of ``further notable declines.'' Still, the strategist does temper her exuberance with some caution: ``These targets are provided to offer a sense of direction and magnitude, not precision.''

Precision, of course, hasn't been Cohen's strong suit of late.

Last March 28, Cohen reduced her equity allocation, but with the stated belief that the major equity indexes would still end the year slightly higher. And while Cohen did shift away from an overweighting in technology that day (saying ``many of the technology shares were given the respect they deserve over the last 18 months, and are no longer undervalued''), she certainly didn't predict anything like the devastating sell-off that would follow. Last year, the S&P 500 index closed 16% below her prediction of 1575, at 1320. The Dow, meanwhile, finished the year 14% shy of her estimate of 12600. And both have fallen even further this year. Year-to-date, the S&P and Dow have shed 5% and 2%, respectively.

Last September, meanwhile, she began predicting brighter days ahead — and the clouds promptly got darker than ever, at least for tech stocks.

But this is a whole new year, and Cohen has taken another stab at target setting. Her current numbers are based on two fundamental beliefs: That the economy will avert a recession, and that corporate earnings for stocks represented in the S&P 500 will strengthen in the second half of the year, surpassing Wall Street's consensus estimates.

As for the economy, Cohen says it's time to forget about the alphabet soup of economic forecasting — ``the optimistic V, the pessimistic L, the complicated W'' — and put things into historical perspective. If you think of the blockbuster growth in 1999 and 2000 as ``unusual and unsustainable,'' then the current slowdown looks like a natural adjustment process that masks the economy's sound fundamentals. In late 1999, excessive investment in technology (brought on in part by Y2K-induced spending on brand-new computers and telecom systems) and a surge in consumer spending (associated with rising employment and incomes) helped push gross domestic product and S&P 500 operating profits to what Cohen calls unappealing growth rates. The fourth quarter of 1999's GDP growth of 8.3% and S&P profit growth of 21% were increasing at three times their historical levels. Now, because of the correction that followed, GDP and S&P earnings should rise more moderately, she says, at levels consistent with additional gains in productivity and low inflation.

On the profit front, there's more bad news to come, she concedes — and the most disappointing news may not be publicly available until early April, when companies begin reporting official first-quarter results. But by the second half of 2001, economy-sensitive stocks should benefit from easier earnings comparisons from a year ago. Indeed, Cohen thinks profits are likely to grow at close to trend rates (around 7%) this year. ``We are increasingly confident that a too-gloomy consensus scenario is priced into share prices,'' she writes.

That goes for technology, too, where the decline in revenues and earnings has been especially pronounced. Although Goldman analysts still forecast more weakness in the near term, Cohen believes that long-term investors ``would be well served to rebuild some portfolio positions now.'' In her opinion, the recent sharp deceleration in technology spending (brought on by pre-Y2K spending and the rapid rollout of Internet and intranet infrastructure) masks the ``still substantial'' demand for technology. And she thinks the significant compression in price-to-earnings multiples during the past 12 months has ``created compelling opportunities.''

This time last year, Cohen's model portfolio was replete with financial-services, energy and health-care names. Now, it's starting to swing away from defensive sectors and back toward economy-sensitive stocks in the technology, consumer-cyclicals and basic-materials sectors. To be sure, these stocks are still on shaky ground. But, as Abby says: ``Opportunities are often the best when uncertainty is rampant.''

Spoken like a true optimist.

-- (M@rket.trends), March 08, 2001

Answers

Is it me, or has Abby been talking up the market for the last forever, including just before the slide over the past year?

Is it me, or do Abby's employers benefit from customers performing increased trades in the market?

Oops, sorry, my cynicism is showing.

-- darrel (dle@symphonics.net), March 08, 2001.

ROTFLMAO

Anybody see the expose' on Dateline, where the ex-Merrill Lynch analyst said "For those in the know, the code used is as follows: when they say 'buy', it means hold; when they say 'hold', it means sell immediately."

-- Maria Largelips (talkinghead@cnbc.con), March 08, 2001.

This 'strategist' is just one more snake oil salesman. He would like you to believe he does not have a vested interest in over-optimising the markets, but they need to keep the transaction volumes up, or Goldman Sachs loses its shorts. So what the heck do people expect this guy to say? I can't believe this is even printed asa news story, and not charged to Goldman Sachs as advertising.

-- this guy is a cheat (moreinterpretation@ugly.com), March 08, 2001.

He would like you to believe he does not have a vested interest in over-optimising the markets, but they need to keep the transaction volumes up, or Goldman Sachs loses its shorts. So what the heck do people expect this guy to say?

Here's a good example of a reactionary sort who doesn't need to actually read the article in question in order to form an opinion on it. (The analyst in the story, Abbey Cohen, is female.)

Anyway, she is one of the more bullish high-profile analysts/strategists out there, and if you keep that in mind you can use her as another bellweather.

-- Bemused (and_amazed@you.people), March 08, 2001.