Graybeards see brighter days

According to some respected graybeards who have been right more often than wrong over the years, the stars are starting to align for an improved stock market and economy.

True, the U.S. Commerce Department reported Thursday that the economy contracted 0.3 percent in the third quarter. It is also true that about 6 percent of Minnesotans are out of work.

It's always darkest before the dawn. And there's precedent and some evidence that the economy will start to grow again within several months: Home prices are still dropping, albeit more slowly, and sales are up, according to this month's activity report by the Twin Cities realty association.

An added bonus: Oil consumption is down nearly 5 percent this year and the price at the pump has dropped since July to the point where it's acting like a $150 billion stimulus package in terms of annualized savings. We're going to import less, substituting biofuels, batteries and natural gas for increasing amounts of gasoline. And those savings on imported oil will help economic growth.

Meanwhile, the stock market seems to have bottomed out. The Standard & Poor's 500 tanked last week at 849, or about 40 percent off its year-ago high. The stock market is a leading indicator of economic recoveries about six months before the statistics are in evidence. And America's largest public companies are up 12 percent in value since last week.

Steve Leuthold, an often-bearish Maine potato farmer when he's not at Leuthold Group, and Jeremy Grantham, a Boston investment manager who accurately called the tech bubble and the housing bubble, say now is the time for patient investors to buy high-quality companies and stock mutual funds.

"Today's stock market is quite undervalued, in the low 15 percent of our 60-year valuation history," Leuthold said Thursday.

On Oct. 2, Phil Dow, veteran equity strategist at RBC Wealth Management, published a piece that looked at the history of market panics, the government's infusion of hundreds of billions to revive the capital and credit markets and concluded that they could start to lubricate the system, might even make a few bucks for taxpayers eventually and that we were on the verge of a recovering market.

"The U.S. stock market is in the process of forming an important bottom in the weeks ahead," wrote Dow, a 40-year market veteran who invests 80 percent-plus of his assets in the stock market. "I recommend anticipating a recovery in the coming 12 months by making serial investments over the next six weeks rather than waiting for the 'all clear' that always appears after a major rally."

Dow, who has learned to stay humble, wasn't claiming victory yet this week. But he's looking pretty good.

"The inmates, the traders and the leveraged hedge funds were running the asylum on Wall Street for a while," Dow quipped on Thursday. "I believe that we're getting back to reality. I see good companies delivering best-of-breed innovation to a vibrant global market and an investment world that utilizes sensible levels of debt. Our markets and people are resilient.

"I like what's forming in this market. And if it goes up to the point where I ever get a tip on a penny stock from the waiter at J.D. Hoyt's, I'm going to 80 percent cash!"

Seasoned investors also know we are not out of the woods yet.

For one thing, this early market renaissance has been aided by the fact that some hedge funds and others that were "shorting" financial institution stocks had to back off under new Securities and Exchange Commission rules. That gave the banks a bump and forced the short-sellers to buy hundreds of millions worth of those stocks to close out their eroding positions. The net effect was to push the market up.

True, there is not a lot of fundamentally good news for the economy at this point.

In his column Wednesday in the New York Times, sage David Leonhardt suggested stocks may not be the bargain they seem. In short, all the consumer borrowing that has led to the real estate bust and the horrendously huge federal deficits will be a drag on the economy, consumer spending and ultimately on corporate earnings that drive stock prices.

But guys like Dow, Leuthold, Warren Buffett and John Bogle, founder of Vanguard Funds, are bullish on the stock market.