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Bad News for Stock Bulls in U.S. After bouncing up and down since January's big downdraft, broad stock-market indexes are nearing the end of the second quarter with percentage losses in the mid- to high single digits for 2008. The question on the minds of many investors is whether a hoped-for second-half rally can take the market back into positive territory. But one of the many obstacles facing the stock market is that, by some key measures, it is close to what is known as "fair value." In other words, stocks aren't supercheap, but they are not expensive either -- they are right about where they ought to be for some time to come. If those readings are accurate, investors should keep their hopes for a modest rebound. The Standard & Poor's 500-stock index closed Friday at 1360.03, and most analysts see it ending the year between 1400 and 1500. While that would represent a gain of roughly 3% to 10% from here, an S&P at 1400 would be down between 4% and 5% for the year, and an index at 1500 would be up only a bit more than 2%. Where the market ends up depends on how much companies earn during the rest of the year and what price, or multiple, investors put on those earnings. Historically, the multiple depends to varying degrees on investor confidence, interest rates and inflation. The other big uncertainty remains the earnings outlook, specifically the degree to which financial companies, which accounted for a third of the market's earnings in recent years, will continue to post big losses. Earnings for the sector are expected to plunge again in the second quarter before recovering in the second half of the year, leaving the sector's earnings down 10% for the year. Many strategists dismiss mean forecasts of 8.2% gains for the index as a whole this year, based on estimates for individual companies, as unrealistically high. They also question expectations for 2009, when earnings are predicted to rocket 20% to $110 a share. "A lot of people are thinking that they can reassemble the earnings machine for financials, and I have my doubts," says Mr. Trennert. High energy costs, meanwhile, cut into profits, especially in industries that consume a lot of fuel, and in companies that use oil-based products as raw materials. Mr. Trennert believes 2009 will actually be worse for earnings than 2008, in large part because of slowing growth outside the U.S. Based on his earnings expectations, Mr. Trennert thinks fair value for the S&P 500 will be 1480 at year-end 2008 and then just north of 1300 for 2009. The 2009 estimate, "is one forecast I hope I'm wrong about," Mr. Trennert says. Market valuations chart (graphic).

11 Top Experts Weigh In on the Economy When the [Barron’s] Roundtable last met Jan. 7 with the editors of Barron's, our distinguished panelists minced no words: This year would be difficult to dismal for the economy and stocks, as the bubbles in housing and credit unwind. So far, so good (er, bad). Most still feel that way about '08, and even '09, though a handful see the skies clearing at last, even for decimated financial and home-building shares.In the pages ahead, we've distilled the latest views of the Roundtable crew. We hope you're enlightened, amused and provoked by them to discover your own truths about markets. And, should you disagree with any of the opinions expressed herein, please, no tomatoes. Analysts estimate the S&P 500 will earn $89.27 this year. Strategists say $79.25. If we use $84.25, which is in the middle, the P/E is 16. The market is fully valued. On a dividend-discount model, as well, it is efficient. In January and February we had the greatest opportunity to buy name-brand technology stocks since the Long Term Capital debacle in 1998. We bought Oracle [ORCL] at 12 times earnings, Texas Instruments [TXN], KLA-Tencor [KLAC], Xilinx [XLNX]. There are no more pockets of opportunity. We're ignoring consumer-discretionary stocks. Everyone is recommending financials. We aren't. We have the lowest weighting in financials since I started Delphi. The only major brokerage we own is Goldman Sachs [GS], because they seem to have weathered the storm. Elsewhere in the industry, the bloodletting continues. The meltdown in housing also is ongoing. The stock market won't get out of its own way until the banking system regains transparency. This also overhangs S&P earnings. The unwinding of the housing bubble is killing the economy. Household net worth is dropping for the first time in five or six years. The average family income in America is $48,600. For Main Street, this is a recession. Real GDP growth in 2008 and '09 is going to be weak, at 1% to 1.5%.

 Stocks in U.S. Show Negative Return on Inflation Gain Inflation is eliminating the rewards of owning U.S. stocks.Surging commodity prices have eroded earnings and spurred the Federal Reserve to consider raising borrowing costs just as equities are trading at their most expensive in four years. Standard & Poor's 500 Index shares yield 0.22 percentage point more in profits than the interest on 10-year Treasury notes, the smallest advantage since 2004, data compiled by Bloomberg show. The last time corporate earnings returned less versus bonds, the index posted its first quarterly decline in more than a year. The 39 percent advance in oil, 61 percent jump in corn and 41 percent climb in rice pushed the UBS Bloomberg Constant Maturity Commodity Index to a record this year. That's squeezing profits as raw-material costs outpace consumer prices by the largest margin since the 1970s. Companies in the S&P 500 will earn 7.7 percent less in the second quarter than a year ago, according to analysts' estimates compiled by Bloomberg.

Shanghai Surprise: China's Stock Boom Deflating Ahead of Olympics China's Shanghai Composite tumbled 6.5% overnight and has now fallen 11 of the past 12 trading days. With the index now down more than 50% from its all-time high in October, it's clear the conventional wisdom about China "holding up" the market before the Olympics was wrong -- as it often is. Darren Chervitz, Co-Manager of the Jacob Internet Fund, has taken an unconventional view of China, long expressing concern about the sustainability of its economic boom -- especially in the face of a U.S. slowdown. But Chervitz notes the action in Shanghai does not necessarily correlate to the performance of Chinese ADRs like Sina.com and Sohu.com, which are among his fund's biggest holdings.

Bond Sales Soar in Europe as Companies Plan for Worsening Credit Markets Companies in Europe borrowed more money from bond investors in the past three months than in any second quarter on record, paying the highest interest costs in a decade on concern credit conditions may deteriorate further. Sales jumped to 252 billion euros ($391 billion) from 227 billion euros in the same quarter of 2007 and from 149 billion euros in the first three months of this year, according to data compiled by Bloomberg. Bouygues SA, the world's second-biggest construction company, and U.K. phone company BT Group Plc led this week's sales of 18.4 billion euros, 43 percent higher than the weekly average for the past year. Treasurers at investment-grade companies are borrowing at yields averaging 6.4 percent, the highest since Merrill Lynch & Co. began tracking the data in 1998, to avoid the risk of having to pay even more as a slowing economy and accelerating inflation threaten corporate earnings.

Five things that will pave the way for a downside disconnect My grandfather taught me many things, one of which was to always think positive. As a financial professional, I'm careful not to confuse that perspective with blind bullishness. As we edge toward the midpoint of the calendar year, the bovine have reason for optimism. Despite credit contagion, debt unwinds, structural smoke, geopolitical risks and a housing abyss, mainstay market proxies are down only mid-single digits. I've learned a few things over the course of my career, three of which currently warrant particular attention. First, the reaction to news is more important than the news itself. Second, stay humble or the market will do it for you. Third, discipline must always trump conviction. With those lessons in tow, I wanted to explore another topic, one that few people have a motivation to discuss. It's the risk of a seismic equity readjustment, a possibility that has much higher odds than most people currently foresee. The market is fluid and multi-linear, which is a fancy way of saying "things can change and they often do." Still, the ingredients for a downside disconnect exist, conditional elements that, when brewed together, could combine for a toxic ride that will come to define 2008. We're currently standing at a crossroads, with inflation on one side and deflation on the other. Given the recent rhetoric from government officials -- jawboning the dollar last week and attempting to quell rate fears yesterday -- it seems like that conundrum in coming to bear. Perception is reality in the financial markets. If the collective mindset shifts from "the worst is behind us" to "we're between a rock and a hard place," the comeuppance will be swift.

The next stars of the stock market The dependable sectors and stocks of the past 5 years have faded. And the reasons they're past their prime hint at where to look for the next market leaders. The current market is starting to look a little tired. It's getting harder and harder to make significant money in the stocks and sectors that have led the stock market in performance over the past five years. It's time to think about the next market, to think about what stocks and sectors might be most profitable to own over the next five years. I don't think the overall stock market is out of the woods quite yet. A successful test of the March low wouldn't remove all my worries about stocks -- given what looks like an extended bout of interest-rate increases around the globe between now and the first quarter of 2009 -- but would lower the odds that we still have a big bear market ahead. If stocks continue to give ground, as they have since the May 1 closing high at 13,010, and the indexes fall through their March 10 lows, then the market still hasn't found a bottom. And I'll remain worried that we're in the early stages of a bear market with the worst quite possibly in front of us. But when I say this market is looking tired, I'm actually talking about something quite different from these hopes and worries about the direction of the general market. All markets, rising and falling, have sectors and stocks that outperform the market. We say that these sectors and stocks lead the market. In a rallying market, they outperform all other stocks. In a falling market, depending on the severity of the overall decline, they either fall less or actually go up in price when other stocks are falling. For the past five years or so, this market has been led by energy and commodity stocks with occasional important contributions from gold and transportation stocks. Stated in this way, these three points are all negative. They tell us why the leadership stocks of the last market are looking tired now. But they also hint at where to look for the next market's leaders:

Mayo Gets to Citigroup First While Whitney `Loves' Being Everyone's Oracle The call sent Citigroup shares reeling -- down 11 percent in seven trading days. The analyst had downgraded the stock after citing investor dissatisfaction with Citigroup's senior management and saying Chairman and Chief Executive Officer Charles Prince should resign. The analyst in question was Michael Mayo, a stock picker at Deutsche Bank -- not Meredith Whitney, the Oppenheimer analyst who has become the toast of Wall Street since her own report on Citigroup. She downgraded the stock to ``underperform'' from ``neutral'' on Oct. 31 after calculating in a research report that the bank's dividends for the third quarter of 2007 exceeded its profits. She also said the bank needed to raise $30 billion in capital. Mayo, 45, gave his negative assessment of Citigroup more than two weeks before Whitney's. He downgraded the stock to a ``sell'' from a ``buy,'' the best call on Citigroup for the 12 months ended on March 31, according to data compiled by Bloomberg. Citigroup was not Mayo's first bold, contrarian call. In 1999, he was a banking analyst at Credit Suisse First Boston. At the height of dot-com mania in the spring of 1999, he issued a ``sell'' rating on all banking stocks when he saw that the merger boom was slowing and problem loans were growing. The stocks did fall dramatically in the next six months. Mayo was fired in September 2000.

When the 'smart money' gets stupid Do fund managers think for themselves? A recent example shows that sometimes even the biggest guns don't. But there are still ways to protect your investments. Examples of misfires by big hedge funds or acquisitive corporations have abounded in recent years. It's unsettling, though, to find out that sometimes the smart money doesn't even seem to try very hard. After all, one assumes the big investors engage in detailed fundamental research, undertaken by talented and knowledgeable analysts, or that they rely on ultrasophisticated mathematical models. Maybe both. The mistakes occur, we assume, when the analysis rests on flawed assumptions or the models overlook important factors. Or when the manager's ego simply runs out of control. But a recent article in the Financial Times cites an even more troubling reason: Sometimes the analysts and mathematical models aren't even consulted. Instead, the big shots occasionally invest simply because their buddies are doing so. That said, how can one know that a mutual fund manager, too, isn't simply using a follow-the-leader investment strategy? One way is to look at the fund's portfolio and see whether it closely resembles the relevant index or the portfolios of other active fund managers with similar mandates. A fund that differs isn't necessarily going to succeed. But at least you're getting some independent thinking for your money. To gain more insight, take a look at the manager commentaries included in annual and semiannual fund reports, and often provided more frequently on fund company Web sites. Mutual fund managers should be able to explain clearly and persuasively why they are buying or selling -- or holding on to -- the securities in their portfolios. Does their reasoning sound logical and thoughtful? Do the moves fit into a well-established, well-articulated strategy? Or does the manager seem to be providing run-of-the-mill reasons to justify buying a popular stock that lots of other people already own?