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After 50% Rally in Stocks, the Most Bullish View May Be the Riskiest

You pays your money and you takes your choice. Three veteran observers of the economy and financial markets offer MoneyWatch their thoughts on the remarkable about-face in stocks this year, along with some speculation on where stocks and the economy are headed.

Two express caution: David Winters, manager of the value-oriented Wintergreen Fund, and Diane Swonk, chief economist of Mesirow Financial. They point out that the mood of investors has brightened markedly without much in the way of auspicious economic developments to justify them. Still, they have benign views on the stock market, parts of it anyway.

James Paulsen, a strategist at Wells Capital Management, contends that the rally that has carried stocks 50 percent higher since early March has a long way to go. His view is the most optimistic by far of the three, but it also may be the most perilous one to follow.

Paulsen believes that stocks are in a position similar to 1983, just after the blastoff that carried prices up nearly twenty-fold in less than two decades. In his bullishness, he is swimming with the current, but he didn't just jump in the river; he was talking up the market long before it became fashionable in the last few weeks.

It is hard to argue with his enthusiasm after the success it reaped, but his analysis is vulnerable to a challenge, and so is the stock market. In stating his case, he seems to make some questionable assumptions and engage in iffy logic.

He notes, for instance, that "bond spreads have narrowed, stocks are up and cyclical stocks are leading." True, but those are iterations of the same phenomenon, increased risk appetite.

The same may go for the plateauing in job losses. Employers, who do their utmost to avoid cutting staff, may be betting on the come, hoping that the much heralded recovery will get legs and allow them to hang on to as many people as possible.

By highlighting these variations on the same theme, he makes conditions appear more robust than they really are.

As for the various stimulus measures, Paulsen suggests that their impact has been barely felt and that there is plenty of life left in them. But look at all that cash for clunkers that has made its way into the economy.

Americans have been paid off for the clunkers they drive and also the ones they live in. Then there are the clunkers that banks had on their balance sheets. Speaking of which, the fact that Goldman Sachs and many of the other usual suspects have handed back the money they were dispensed confirms that the stimulus funds have had their intended impact.

What gets lost amid the stimulus programs and cash-for-everything is that it is our cash and that it must be repaid one day. The economy has been jumpstarted but may be destined to run in second gear, at best, for some time to come. Investors could be correctly anticipating recovery but perhaps not the feebleness of it.

Stock buyers may not have a proper appreciation of the rocky path the economy is likely to travel, but consumers apparently do. An unexpectedly weak consumer confidence reading last Friday was blamed for a sudden and sharp reversal of stock market gains here and abroad.

Seems like old times. Past bull markets have hinged on the largesse of consumers, and so does this one. All of the pillars - housing, banks, China, jobs - depend on it. It could be argued that unless consumers come to believe soon, and just as strongly as investors, that a recovery is at hand, the fledgling bull market may be doomed.

When Paulsen encourages investors to buy stocks, he stresses that he is making a long-term call. It may be the right one, but before the long term, there is a treacherous short term to get through.

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