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To the smart money, stocks look like a buy

(MoneyWatch) Money managers and investors are gathering in Chicago for the annual Morningstar investment conference this week amidst a grim economic backdrop. And all that bad news is cause for optimism among some old pros in the investing business.

John Rogers, chief executive officer of the Ariel family of mutual funds, told me he has not seen so much pessimism since the late 1970s and early 1980s - when BusinessWeek famously declared "The Death of Equities."  Investors fled the stock market back then, creating a once-in-a-generation buying opportunity.

"Pension fund managers are bragging about how little they have in domestic equities," said Rogers, who is based in Chicago but sits on numerous boards. "I was just at a wedding and everyone, at all levels of sophistication, was talking about how Greece is falling apart and Europe's a mess and the [fiscal] cliff is coming and we've got too much debt. When everyone agrees how bad things are, that says to me we're close to a bottom."

As a curtain raiser on the conference Wednesday, Morningstar convened a panel of money managers who have been investing for more than a quarter century and could therefore put the current market in historical context. While the panelists were not ready to declare that the next bull market is just around the corner, they agreed that fear seemed to be dominating investor decision making.

As anyone on a fixed income is all too aware, interest rates are at rock bottom levels. Bond payouts "are not going to get you where you need to go," said Susan Byrne, founder of Texas-based Westwood Management. But she made the case that historically, bonds have not generated much return over inflation, so 7 percent yields in the inflationary '70s were not that much better than today's 1 and 2 percent yields.

Investors from around the world have been pouring money into U.S. Treasury bonds in a desperate attempt to find a safe haven, and that has helped drive down rates -- Why should the government pay more to investors than it has to? Yields have been falling, not quite in a straight line, for more than 30 years. As a result, older, higher-yielding bonds have become more valuable, so investors have made money. But Byrne warned against the belief that the trend will continue.

"The role of bonds is that when everything else is falling around you, what you have is appreciation in [the bond] part of your portfolio to provide you with liquidity, and, quite frankly, sanity," she said. The panelists believe that dividend-paying stocks will provide much better returns in coming years. And while their years of experience led them to believe the market was a decent buy right now, Byrne also warned that there's never any certainty: "Admitting to yourself you really don't know is a very hard discipline."

Brian Rogers, chairman of T. Rowe Price, pointed out that since the 1990s boom ended, corporate earnings have climbed while stocks have fallen or gone nowhere. As a result, they are a lot cheaper now. The panelists did not go into detail about how the various global crises would be resolved, but Rogers said he doesn't expect us to fall off the "fiscal cliff," - the end of the year moment when the Bush and Obama tax cuts expire and automatic spending cuts kick in. Some analysts predict that the combination of tax hikes and spending cuts could send the country into recession.

"My guess is it gets pushed farther off," he said.

Arguably the most successful investor in the group was Will Danoff, manager of the Fidelity Contrafund. As the name of the fund suggests, Danoff's style is go against the crowd.

"The U.S. is the leader in biotechnology, the U.S. is the leader in technology, natural gas is cheap, housing hopefully has bottomed, and prices will go up from here," he said. "The blue chips, the Nikes and Colgate Palmolive, will sell their products all over the world. I feel good about investing in U.S. companies right now."

Rogers closed the session with the off-quoted but rarely followed admonition from Warren Buffett: "Be fearful when others are greedy and greedy when others are fearful," he said. "That applies right now."