NEW YORK (CNN/Money) - In the past months, two of Wall Street's most bullish strategists got carted off to the slaughterhouse. For the stock market, it's a step in the right direction.
During the go-go years, nobody pounded the table quite as hard as Lehman Brothers' Jeff Applegate and Credit Suisse First Boston's Tom Galvin. Both had replaced bearish predecessors and both became progressively more bullish as the rally wore on. When the market hit a top in March 2000, they were each recommending that clients keep a whopping 80 percent of their portfolios in stocks.
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Even as the market tanked they remained bullish, as their most recent suggested allocations show. At the time of Galvin's firing in late October, he had cut only to 70 percent stocks. When Applegate got the pink slip last week, he was still recommending 80 percent stocks.
Taking over for Galvin is Paddy Jilek, a CSFB economist whose occasional research notes on corporate issues have garnered a wide following. He has yet to issue a recommended asset mix, but on the basis of his past work it seems likely he will be more critical than Galvin. A replacement for Applegate hasn't been named.
Opposites attract
To the contrarians on the Street, this is all good news -- though there is more cleansing of optimists to be done. "It's a great sign when everyone is firing their bullish strategist," said Kari Pinkernell, one of Merrill's bearish strategists.
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| | Firm | | Strategist | | Stock weighting | | Banc of America Securities | Tom McManus | 70% | | CIBC World Markets | Subodh Kumar | 75% | | Goldman Sachs | Abby Joseph Cohen | 75% | | J.P. Morgan | Carlos Asilis | 50% | | Merrill Lynch | Rich Bernstein | 50% | | Morgan Stanley | Steve Galbraith | 70% | | Prudential | Ed Yardeni | 65% | | UBS Warburg | Ed Kerschner | 89% |
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Merrill uses a monthly tally of strategists' recommended asset allocations to create what it calls the sell-side indicator. When Wall Street strategists recommend investors carry a high percentage of stocks in their portfolios (as opposed to bonds or cash), it's a good sign the market has gotten too expensive. When equity allocations are low, the opposite is true.
The amazing thing is that throughout the downturn, the sell-side indicator has kept on flashing sell. At its last sounding, at the end of October, it showed that Wall Street strategists recommended clients keep 69.2 percent of their portfolios in stocks -- not far from the all-time high of 71.5 percent logged last fall. The indicator needs to be below 61.7 percent for the sell signal to switch off.
There are still plenty of strategists advising clients to own a big chunk of equities. Goldman Sachs' Abby Joseph Cohen recommends clients keep 75 percent of their portfolios in equities, while UBS Warburg's Ed Kerschner recommends 89 percent.
"A lot of investors ignore these people because they've burnt them so badly," said Larry Rice, a vice president at Janney Montgomery Scott. "When all the pompoms get replaced, that's usually the sign of a bottom."
With recommended allocations of 50 percent, J.P. Morgan's Carlos Asilis and Merrill's Rich Bernstein have the lowest equity recommendations. Maybe that seems light, but in the spring of 1998 UBS Securities' Gail Dudack recommended investors keep just 45 percent of their portfolios in stocks, Merrill Lynch's Chuck Clough was recommending 40 percent and CIBC Oppenheimer's Michael Metz was recommending 25 percent. None are working as strategists at a major Wall Street firm today.
In fact, many investors point to the pushing aside of Merrill's Clough as a sign the bull market had come to an end. (He was replaced by the bullish Christine Callies, who lasted little more than a year.)
"I vividly recall Charlie Clough being fired in early 2000 coincident with the market top," said Doug Kass, who runs the hedge fund Seabreeze Partners. "He was wildly bearish. Nobody has ever accused brokerage management of having good timing."
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