Jerry Jordan, manager of Jordan Opportunity fund, expects a big market rally in the second quarter. But he's not so optimistic about the economy. By Andrew Tanzer, Senior Associate Editor February 18, 2009 With bearish sentiment at a fever pitch, it's newsworthy when we find an intelligent, experienced investor who takes the opposing side. So we'll tell you about Jerry Jordan, manager of the Jordan Opportunity (symbol JORDX) fund. Jordan expects stocks to rally powerfully in the second quarter, possibly driving up the Dow Jones industrial average to 11,000 or higher, a 45% gain from current levels (the Dow closed February 17 at 7,553).Jordan believes the fourth quarter of 2008 and the first quarter of 2009 will be the worst periods for the economy. After that, he expects the economic data to start getting less negative. By the end of this year, the Boston-based manager thinks growth could limp into positive territory again. The key, says Jordan, is that the market focuses on changes from one quarter to the next, not on how a company did in comparison with the same quarter a year earlier. For instance, let's say buyers halved the number of orders for a company's widgets from 100 in the first quarter of 2008 to 50 in the current quarter. If the number of widgets ordered were to rise to just 75 in the second quarter of '09, investors would ordinarily react favorably. Jordan says the market is pricing stocks as if the recession will remain at its most severe for several more quarters beyond the first. Once the market sees the trend improving, stocks will snap back, he reasons. Jordan thinks the trend will grow clearer over the next four to six weeks. "Historically, stocks bottom six to nine months before the bottom of a recession," he says. Advertisement Jordan is also encouraged by developments in China and their impact on raw-material prices. He notes that new factory orders in China have just gone positive for the first time in months. Prices for iron ore and steel are firming in Asia, and rates for shipping freight are again showing signs of life. So what stocks does Jordan favor? His investment process is an interesting meld of big-picture economic analysis, technical analysis and fundamental industry analysis. He's particularly bullish on energy and steel stocks; he also likes several health-care companies. It may take two years for energy demand to recover, says Jordan, but the supply picture is even worse. Production is falling in Russia, Mexico and the North Sea, and energy companies everywhere are slashing budgets. That will result in a struggle to boost output. His favorites in energy are two deepwater-drilling companies, Transocean (RIG) and Diamond Offshore Drilling (DO). "We'll desperately need offshore drilling to keep oil production flat," he says. Both stocks have been crushed during the bear market. In steel, Jordan likes Nucor (NUE). Steel inventories in the U.S. are at rock-bottom levels -- production fell in the fourth quarter at a faster rate than during the Depression, Jordan says -- but demand will increase as spending for infrastructure projects ramps up. Advertisement One reason Jordan invests in health-care stocks is that they don't closely track the moves in the shares of raw-material companies, his favorite sector. In health, Jordan holds Abbott Laboratories (ABT) for its consistency and stream of new products, such as heart stents. He particularly likes companies with long-lasting patents, such as biotech giants Amgen (AMGN) and Genzyme (GENZ). Jordan reasons that the patents biotech companies hold protect them from general price deflation. Jordan's fund, which began in January 2005, has performed relatively well in its brief history. Over the four-year period that ended last January 31, the fund lost an annualized 1.9%. Over the same period, Standard & Poor's 500-stock index declined 6.7% a year. Although Jordan is bullish about the stock market for the short term, he isn't particularly optimistic about the prospects for the U.S. economy. He says that indebted consumers will take years to get out of the hole they've dug, and that means "a portion of the economy won't be as robust as before." And he thinks the U.S. may need to devalue the dollar to climb out of its financial mess. "That's what other countries in this predicament have done," he says.