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Buy Cyclicals and Emerging Markets Ahead of the Upcoming Rebound: Paulsen

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It must be the Meredith Vieira effect, because I can't help applying her Today Show send-off tune Don't Stop Believing, to the optimistic outlook of Jim Paulsen, Wells Capital Management's chief investment strategist.

Rome is burning, baby, and Macke and I are loath to step in front of it. But Paulsen, in all his scruffy Minnesotan glory, continues to have his feet planted firmly on the soft patch and is looking forward to rising estimates and up to 4% GDP growth in the second half of 2011.

Right now, Paulsen says he's "looking at the cyclicals. The stuff that's really getting beat up." And even though he says the market could stay sloppy all summer or take off next week, his line of sight arcs six months into the future -- a future he predicts will bring economic improvement, positive earnings revisions and people running to get back into cyclicals.

If you're not quite ready to wrestle a bear market to the ground, then Paulsen's other strategy might suit you well. "My favorite is the emerging markets (EEM) right now," he says, adding that they've just begun to thaw from their longest post-recovery slump. He adds that emerging market central banks have been tightening for a year to keep their economies from overheating and "they've succeeded in creating a soft-landing ... and the market is already picking up on this." As they announce that their tightening is done, he thinks "emerging markets will lead again."

And he has a point. "All last year we were told not to buy them (emerging markets), that they were going to overheat, that China was going to melt down," says Paulsen. But the foreign central banks have accomplished what they wanted, their economies are "growing more modestly" and therefore "it's a good time to be in."

Another line of attack for Paulsen is the dollar. He's not ready to call himself a dollar bull as much as he thinks it has stopped declining. Here, his analysis shows an improving dollar typically has a two-year lag effect on the forex markets and trade flows. In other words, exports will be adding to GDP based on the foreign exchange moves over two years rather than the past two months.

So before you get too comfy in your bear suit, give Jim Paulsen a few minutes of your time if only to hear what the other side thinks. And of course, let us know what you think below or email us: breakoutcrew@yahoo.com.

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