By Brady Willett -- FallStreet.com
Dec. 20, 2006 -- The contradictions running wild today have rarely been more acute. To be sure, and depending on the source, the U.S. economy is supposedly already in recession, stocks are in a great new bull market, China is about to dump greenbacks for gold, and the commodities bull is dead but will last another 30-years. For yet another example of just how far the confusion stretches consider that Merrill’s chief investment strategist, Richard Bernstein, recently co-authored a report covering ten “growth themes” with an “unrecognized twist”, and that his first platform was to ‘Buy large-cap stocks in developed markets’. That Mr. Bernstein has resorted to suggesting that large cap stocks have an ‘unrecognized’ safe haven appeal is, to say the least, surprising. After all, before the most recent rally large caps had underperformed for 6-years and everyone on Wall Street had already beaten this contrarian theme to death.
Suffice to say, as potentially dangerous amounts of liquidity in the marketplace congeal with a profound air of contradiction, attempting to smell out big theme opportunities is akin to trolling an overfished river at high noon: both the timing and location are unlikely to yield a catch. Mr. Bernstein -– who has been more bearish than most since taking the helm at Merrill in 2001 -– is hardly oblivious to today’s unique challenges:
“… it is getting harder to find growth themes that have not already been exploited because of the continued abundance of liquidity and leverage.”
But in the face of uncertain waters many on Wall Street are compelled to float investment idea that may -- hopefully -- benefit from the next major liquidity shift in the marketplace. Moreover, in many cases people like Mr. Bernstein concoct these themes regardless of whether they run contrary to their macro beliefs.
As the example below will show, finding an attractive and potentially under-covered investment idea can in fact be done. However, taking the plunge and actually investing is a different story altogether. The lesson is that many investment themes have become slaves to the overriding theme of liquidity, and in order to pursue many ideas you must believe that the good times are here to stay. For his part Mr. Bernstein has started to believe*, which in and of itself may be a sign that the good times are about to end.
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