My Lucky 13

Investors weren't bluffing when they told pollsters they'd vote for President Bush, and they've been anteing up ever since his re-election. It was only a matter of time before foreigners swallowed their reservations and joined the fun. A 15% discount on oil translates well into any language.

I admire the courage of near-term contrarians like Smith Barney's Tobias Levkovich, who worries that sky-high sentiment could suffer quite a letdown as the profit warnings start to roll in next month. The cash positions of retail investors relative to the value of the market are as small now as they were when the dot-com bubble burst four years ago, Levkovich notes. Then again, those cash levels were no higher for much of 1997, 1998 and 1999, and stocks performed splendidly in those years.

The charts of small caps, midcaps, commodity stocks, transport stocks and gold already describe roaring bull markets. Seasonal factors like bonuses, pension contributions and the holiday lull in IPOs tend to tilt fund flows against the bears until the latter half of January.

Going "all in" is a risky endeavor. But I feel better knowing that the price/earnings ratio of my portfolio is a lucky 13. That hardly amounts to an ironclad performance guarantee. But I'm convinced that my 13 can beat the S&P's 18 in all sorts of markets.

Thirteen is low enough to wait and see whether we can really have a January election in Iraq, and whether any elected government there can legitimize continued U.S. occupation. In the meantime, we're stuck dancing with wolves a lot less cuddly than the ones Karl Rove scared up for those commercials. The latest bill for those dancing lessons is due early next year.

Thirteen is low enough to wait and see how long a superpower with a savings rate below 1%, gaping budget deficits and a sense of permanent entitlement can depend on the generosity of foreigners. The bet here is, for quite some time, which is why my portfolio consists entirely of overseas stocks, gold and the Pimco NFJ Small Cap Value fund (PSVIX), a domestic small-cap value fund emphasizing raw materials.

As the temporary proprietors of the world's reserve currency, we get the first shot at debasing it in an attempt to stave off hordes of Asian peasants yearning to be rich. I fully expect us to take advantage of this opportunity, despite the fact that every hedge-fund trader in captivity seems to be thinking along similar lines.

In fact, China might soon expedite this goal by revaluing the yuan against the dollar, allowing us to import some inflation through Wal-Mart (WMT). Thirteen is low enough to wait and see whether the revaluation's primary beneficiaries will in fact prove to be exporters from Europe, South Korea and Japan.

Just don't forget to double-check the price/earnings ratios of stocks that once seemed cheap. Take DRS Technologies (DRS), a military contractor extolled in this space last year as an attractive alternative to the better-known tech supplier Cisco Systems (CSCO).

I praised DRS based on its reasonable valuation and plans for higher military spending. But in truth, it just happened to be the defense contractor reporting earnings the same day as Cisco, and striking a much more confident tone. That confidence certainly proved justified over the last 15 months, rewarding DRS shareholders with a 54% capital gain. Cisco shares are up just 10% over the same span, despite the company's heavy expenditures on buybacks. But the net result is that the DRS valuation edge has eroded completely, accomplishing the difficult feat of making Cisco seem a bargain.

Military spending is increasingly likely to be contained by the imperative to limit budget deficits. At the same time, Cisco's markets ought to be recovering. If DRS continues to outperform over the next year or two, this entire economy and my 13 p/e portfolio are in deep trouble.