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ERROR: type should be string, got "https://www.wsj.com/articles/SB50001424052970203408504575588611483373600\nBack to the Future: Stocks Hit a Post-Lehman High\nKopin Tan\nUpdated Nov. 6, 2010 12:01 am ET / Original Nov. 6, 2010 7:22 am ET\nSTOCKS CLIMBED TO THEIR highest levels in 26 months, with the Dow Jones Industrial Average reaching its highest peak since Lehman Brothers' collapse set off a world-wide financial crisis. Now what could possibly Sherpa stocks higher?\nLast week's 3.6% gain was delivered on the backs of two long-anticipated events: Republicans seized control of Congress in the midterm elections, and the Federal Reserve said it will pump $600 billion into our economy, by buying roughly $75 billion worth of Treasury securities per month through next June. It also helped that manufacturing activity expanded in October and the U.S. economy added 151,000 new jobs, the best showing since April.\nSeveral catalysts are needed to extend that high, the first of which involves tax policy. \"With 36 different tax programs set to expire on Jan. 1, some clarity is needed on any potential extensions of part or all of the tax cuts,\" notes Citigroup strategist Tobias Levkovich. Traders are already counting on an extension, and Citi's call for 2.2% economic growth next year, for example, could be slashed by half if the Bush tax cuts were allowed to expire.\nAlso, \"confidence remains more subdued than it could be, especially as way too many Americans believe that the country is headed in the wrong direction,\" Levkovich adds. A persuasive plan to cut our deficit and chip away at the government's ballooning debt burden might surprise skeptics and could help restore economic confidence in the long run. The president's commission for deficit reduction will report on Dec. 1.\nMeanwhile, corporate America must squeeze greater earning power from today's hospitable interest rates. Standard & Poor's 500 companies are on track to earn a weighted average of $85 a share in 2010, according to Thomson Reuters. While analysts' projections for earnings to grow 13% next year to $96 seem rather optimistic, it will take a mere 4% improvement to surpass the previous peak in profitability, when companies earned $88.18 in 2006.\nIf today's leaner, meaner companies merely matched their 2006 prowess and earn $88 a share next year, the stock market would be valued at 13.9 times future profits. Only once in the past two decades has the S&P ended a year with a price-to-earnings multiple of less than 14, notes BofA Merrill Lynch strategist David Bianco. That was in 1994, when the Fed was hiking rates and the 10-year Treasury yield was pushing 8%. Today, the Fed is hell-bent on keeping rates low, and the 10-year yield is slumping at 2.5%. Bianco sees S&P profits topping $90 next year and thinks \"there's room for stocks to rally on the earnings outlook alone.\"\nOf course, valuation multiples and public confidence are so low because our government is burdened with debt, and investors are rightly concerned that much-needed austerity measures will crimp profits in future. That's why this uncomfortable rally was populated largely by performance-chasing professionals, and even as stocks rose 17% over the past 10 weeks, individual investors yanked more than $39 billion from U.S. stock funds and plowed $83 billion toward bond funds.\nThe S&P 500 is now 21.7% below its 2007 peak. To close that gap, more investors must believe that stocks offer a viable–or at least cheap—hedge against the inflation that must eventually follow the Fed's frenzied money printing. As the dollar slid further last week, crude oil and copper rose to 2010 highs, and gold closed in on $1,400 a troy ounce, a record.\nThe Dow ended the week up 326, or 2.9%, at 11,444. The S&P 500 rallied for a fifth straight week and snagged its ninth gain in 10 weeks as it added 43, or 3.6%, to 1226. That's its highest finish since Sept. 19, 2008, and the benchmark is up 9.9% this year. The Nasdaq Composite Index added 72, or 2.9%, to 2579, while the Russell 2000 jumped 33, or 4.7%, to 737.\nA PROLONGED REGIME OF LOW BORROWING costs might bring some relief to the cash-strapped and financially feeble, but in the long run it benefits those that already have the strongest balance sheets. That would be big tech companies–one reason why the Technology Select SPDR (ticker: XLK) has jumped 21% since late August, when traders first caught a whiff of the Fed's money-printing plans. That's second only to the 22% rise for the Energy Select SPDR (XLE), which was lifted by traders fleeing the dollar for hard assets.\nTech companies are already sitting on surplus cash, but now they can raise more by issuing debt at rock-bottom rates, as Microsoft (MSFT) recently did. With their fortified arsenals, tech companies have more firepower to grow their businesses, acquire pesky rivals or, when all else fails, appease investors by buying back shares or paying dividends.\nTech spending also depends more on corporations (which are rich but worried) than on deleveraging consumers (who are poorer and worried). Earnings are still growing rapidly, up 8% in the third quarter from the second. And as Merrill's Bianco points out, big tech stocks are sporting their cheapest valuations since 1995, not to mention a 25% discount to their smaller brethren.\nTech valuations are compressed because investors are growing less convinced that the tech wizards at Apple (AAPL) and Google (GOOG) know how to deploy their balance sheets efficiently, or even care to extract the best bang for their considerable bucks. So go ahead, Steve and Larry and Sergey, prove us wrong, and we might watch your stocks lead the market higher in 2011.\nMeanwhile, financial stocks remain more than 10% off their April highs. These laggards could catch up when the Fed allows healthier banks to increase their dividends, but uncertainty lingers over mortgage put-backs and Europe's debt problems (under the radar lately but hardly resolved). Goldman Sachs' option strategists suggest using call options on the Financial Select SPDR (XLF) as a way to position for stock gains while limiting risk. They also like calls on Citigroup (C), which could shake the overhang of government ownership by the end of the first quarter.\nTHEIR SKINNY, WHISKERED, RIPPED jeans aren't exactly age-appropriate, and giant rhinestone-studded sunglasses clash with my gray wardrobe. Still, I'm finding reasons to like Guess.\nThe over-30 set might know Guess (GES) as a pioneer in designer denim, but these days the company designs, distributes and licenses a staggering array of merchandise for women, men, children and the home, including clothing, jewelry, shoes, watches, luggage, fragrances and even bed linens. It also operates more than 400 stores in the U.S., and about 100 overseas.\nWhat makes Guess a good fit for our times? The Los Angeles brand sells luxury at more affordable price points to the globe's aspiring middle class, straddling that lucrative middle ground between Gucci and Gap. Nearly 56% of its sales–and 75% of profits–come from outside North America, which makes the stock appealing to money managers who expect the dollar to stay weak in 2011.\nWhen Guess reports third-quarter results on Nov. 23, the debt-free company also might outline plans for spending part of its $480 million cash stash. It already pays a 64-cent dividend, for a 1.6% yield, and generates more than $2.50 a share of free cash flow, which would give it ammunition to buy back shares.\nBut recent concerns about the departure of its longtime chief operating officer ought to dissipate now that Guess has named former Nike (NKE) executive J. Michael Prince as a replacement. The new COO starts Nov. 15. Another worry: the glut of jeans, although denim drives just a quarter of the retailer's sales.\nGuess shares have rallied 22% since late August, ahead of the 19% gain in the S&P Retail Index in the same stretch. If low interest rates and the central bank's money-printing scheme manage to goose consumer spending–hardly the stuff of consensus forecasts right now–then retailers like Guess stand to benefit further.\nAt about 41, the stock also looks cheap compared with its peers and its own historical standard. Despite net profit margins that are nearly twice the industry average, Guess shares fetch 12 times projected 2011 profits, and even less excluding its cash hoard. That would seem an untenable discount to stocks such as Abercrombie & Fitch (ANF), at 17 times earnings, Polo Ralph Lauren (RL), at 19 times, or an average multiple of 13 times for apparel retailers. It is also below median multiple for Guess of 16.3 times in the past five years.\nCredit Suisse analyst Omar Saad expects Guess to deliver per-share profits of $3.40 in 2011 and $3.85 in 2012, and he thinks return on invested capital will exceed 20% in the next few years. His price target: 60.\nRecovery High\nThe Dow's fourth gain in five weeks took it to its highest level since Lehman Brothers collapsed. A big help: the Fed's plan to pump $600 billion into the economy.\nE-mail: kopin.tan@barrons.com"