The Institute for Supply Management has released its latest services sector report, and the results were encouraging: The group’s non-manufacturing index indicated that service sector activity expanded in September for the first time in almost a year.

The index rose to 50.9%, slightly above the 50% mark that is the demarcation between an expansion and a contraction. The index’s data subsets painted a picture of a service sector in which demand is picking up, but prices are tumbling — ISM’s business activity index rose to 55.1% and its new orders index rose to 54.2%, but the group’s price index fell from 63.1% in August to 48.8% in September.

Earlier this month, The Wall Street Journal had an interesting piece on the challenges — and opportunities — facing income investors. Dividend payouts have dropped dramatically since the market made its big declines last year, with second-quarter S&P 500 dividends coming in $14.3 billion lower than they were a year ago — the largest drop in more than 40 years. June dividends alone for the index were down $6.6 billion, the largest drop on record, the Journal’s Tom Lauricella reports.

But there’s another side of the coin: “Dividends are down,” S&P’s Howard Silverblatt told the Journal, “but the market is down more.” And that means that yields are up, with the S&P yield almost 2.5% this month, versus less than 2% two years ago.

Time magazine recently had a piece on “the least known key economic indicator” — the Baltic Dry Index.

The BDI, which is a measure of worldwide shipping rates, has “registered some eye-popping gains over the past month,” Time’s Jeff Israely writes. “The London-based index registered its 23rd straight daily gain on Wednesday, closing at 4,291, its highest mark since September and the longest streak of gains since July 2006.” Daily rates for large “Capesize” ships that typically carry iron ore were at $93,197 last week, Israely notes; five months ago, they were a small fraction of that, sitting just above $2,000.

Alternative energy is a hot topic these days. With oil prices on the rise again and the Obama stimulus package making non-fossil-fuel development a priority, many investors are taking another look at firms in what could be an incredible growth industry.

But excitement about an industry that could be "the next big thing" can be dangerous. For proof, look no further than the early part of this decade, when investors poured into just about any tech and Internet stocks they could find, hoping they'd get in early on the next Microsoft (MSFT) or Yahoo (YHOO). Many such stocks soared in the short term but then came crashing back down to Earth, as it became clear that blind hope -- not fundamentals or a good business model -- were driving those stocks.

MarketWatch recently had an interesting piece on contrarian investment strategies, highlighting the fact that many of the contrarian managers who were hit hard last year are now netting some strong bounce-back gains.

"As the market has bounced back in recent weeks, [several] contrarian-style funds, with their bargain-minded ways, have been outperforming," writes MarketWatch's Sam Mamudi, discussing well-known contrarian managers like David Dreman, Bill Miller, and Marty Whitman.

The market's continued strength over the past two weeks has been very encouraging. For stocks to continue to climb after such a surprisingly weak GDP announcement and during the quasi-hysteria caused by the swine flu news indicates that expectations had gotten so low in the earlier part of this year that stocks did indeed become quite undervalued. Now, any flickers of hope seem to be slowly pulling money back into the market -- and there's a lot of it out there to pull back. According to Forbes, investors have $9.5 trillion in money with zero maturity -- cash sitting in Treasuries or money market accounts. Charles Schwab's Chief Investment Strategist Liz Ann Sonders says that is more than the value of all publicly traded U.S. firms, and represents the most money sitting on the sidelines in history.

Still, even with all that cash laying in wait, many are saying that now is no time to put money into stocks. I disagree, and I thought it would be a good time to counter several of the bearish arguments I've seen recently. Here they are -- with the other side of the story.

In every other issue of my investment newsletter, The Validea Hot List, I look in detail at one of the computerized guru models I run on Validea.com. In this week's issue, I outlined the growth/value strategy that James O'Shaughnessy found produced tremendous results over more than four decades. Below you will find an excerpt from the newsletter along with a handful of top-scoring stock ideas based on the O'Shaughnessy investment strategy.

Taken from the April 3, 2009 issue of The Validea Hot List:

Price-to-Sales ratio (PSR) is a measure used by many of the Guru Strategies I run on Validea.com as a way to find undervalued stocks. The ratio, which is simply the market capitalization of the firm divided by the company’s sales, has become more popular over the years as investors look for additional ways to uncover value among publicly traded stocks.

The individual who popularized the PSR is Ken Fisher. Fisher, a longtime Forbes magazine columnist, is one of the most widely recognized names in the money management business. His firm, Fisher Investments, manages tens of billions of dollars. In his 1984 book Super Stocks, Fisher outlined an investment approach using the PSR – this is the approach I utilize in the computerized Price/Sales Investor strategy on Validea.com.

The big question in the market these days seems to be, “Have we hit a bottom?” After enduring a bear market that has lasted nearly 18 months and cut the value of the S&P 500 in half, it’s certainly a reasonable question. But in the latest issue of my Validea Hot List newsletter, I explain that now is no time to be sitting on the sidelines trying to wait for a clear, precise bottom.

In reality, any bottom-call is just an educated guess — and, given the depth of this crisis, the unprecedented government actions made in response to it, and the sheer panic gripping many investors, trying to figure out whether we’ve actually hit bottom yet is something of an exercise in futility. You could analyze the heck out of every indicator you can get your hands on, and in the end you might not be much better off than if you’d just flipped a coin to decide whether we’ve bottomed or not.

MarketWatch’s Paul Farrell recently offered up a scathing critique of “quants”, complete with this eye-catching subhead: “By Predicting Your Behavior, Quants Control Your Mind, Money, the Markets”.

Since I run what could be considered “quantitative strategies” both on my web site, Validea.com, and in my money management business, I was interested to see what Farrell had to say about quants and their impact on the market.

[Taken from the March 6, 2009 issue of The Validea Hot List]

If you’ve been a reader of mine for any significant amount of time, you know that my Guru Strategies have a distinct value bias. The majority of these models — ranging from my Benjamin Graham approach to my Warren Buffett model to my Joseph Piotroski strategy — are focused on finding good, often beaten-down stocks selling at bargain prices; that is, they target value stocks.

Earnings: It’s been a dirty word for the past several months, as companies across the country have been posting some ugly results and slashing estimates of future earnings. Standard & Poor’s is now projecting $54.70 in 2009 operating earnings per share for the S&P 500, and just $41.88 per share in as-reported earnings for the index’s components. By comparison, as recently as 2007, operating earnings for the S&P 500 were $82.54 per share, and as-reported earnings were $66.18 per share.

Given the bleak earnings climate, I thought it would be interesting to focus on a quality valued by several of the gurus I follow: earnings consistency, or earnings persistence. Many stock analysts use an earnings growth rate calculation to try to determine the future profit growth prospects for a company. But many of the gurus I follow were interested in looking at earnings persistence and consistency not only to calculate future profit growth, but also to gauge the financial stability of the firm. Many of the experts, including Warren Buffett, want a consistent stream of profits because this allows them to effectively value the business, without major year-to-year fluctuations skewing the earnings picture.

In his latest MarketWatch column, Mark Hulbert wonders whether the recent market plunge has shown that “maybe Ben Graham isn’t old-fashioned after all”.

Over the past couple decades, Hulbert says, the strict, conservative approach used by Graham — who is known as both the “Father of Value Investing” and the mentor of Warren Buffett — had fallen out of favor on Wall Street. But as the current downturn has dragged on, Graham’s approach seems quite relevant again, Hulbert says.

One of the hardest things to do as an investor is go against the grain. Being a contrarian by investing in stocks that no one else wants to touch with a ten-foot pole is difficult, especially in markets like this. But most good value investors, including Warren Buffett, David Dreman, John Neff and others, use strategies to uncover value where no one else wants to look. The Dreman strategy, in particular, has a deep bias for unloved, out-of-favor stocks.

To identify those types of companies, the approach uses four price-focused variables: Price-Earnings Ratio, Price-Cash Flow Ratio, Price-Book Ratio and Price-Dividend Ratio. For a stock to even be considered by my Dreman strategy, it needs to meet at least two of these valuation tests (in addition to a host of other criteria).

In my new investing book, The Guru Investor: How to Beat the Market Using History’s Best Investment Strategies, I outlined the investment approaches of ten highly successful long-term investors. One of the individuals I highlight is the well-known contrarian, David Dreman. Dreman is chairman of Dreman Value Management and a longtime Forbes magazine investment columnist. I hope you enjoy the following excerpt from Chapter 5 of The Guru Investor, which discusses who David Dreman is, what his strategy consists of, and how to best implement it. I will be publishing a follow up to this piece in which I will highlight 20 stocks that meet an all-important variable in Dreman’s investment approach.

I’ve added a new investment model to my arsenal. It’s based on the “Magic Formula” strategy that Joel Greenblatt outlined in The Little Book that Beats The Market. Some of what you’ll find below is a recap of a post I did last week, but in this post I’ve also included the ten stocks that are currently in my Greenblatt-based portfolio.

The beauty, and attractiveness, of Greenblatt’s “Magic Formula” lays in its perceived simplicity. The purely quantitative approach has just two variables: return on capital and earnings yield. Greenblatt’s back-testing found that focusing on stocks that rated highly in those areas would have produced a remarkable 30.8 percent return from 1988 through 2004, more than doubling the S&P 500’s 12.4 percent return during that period. Greenblatt also posted impressive numbers in his money management experience, with his hedge fund, Gotham Capital, producing returns of 40 percent per year over a span of more than two decades.

The American Association of Individual Investors (AAII) recently published its 2008 stock screening review ($$). For those that may not know, AAII has been tracking the performance of its screens since 1998. Through December 5th, the median performance for all of the AAII strategies was -41.7%. But, there was one strategy that was positive. And not only was it positive, but, amazingly, it was up 32.6% for the year through the start of December. I found this totally mindblowing, and as I looked into this in more detail I realized that the strategy was the same as one of the models we run on Validea.com.

What strategy was it? The quantitative approach based on the investment method developed by Joseph Piotroski while he was an accounting professor at the University of Chicago.

I always find it interesting to look at the guru portfolios I run on Validea and ask the question “what is working now?" Over the last month, in a period where the S&P is up 0.4%, 11 out of Validea’s 13 portfolios have outperformed. The best performer is my Ben Graham strategy, up 9.4%. Incidentally, the Graham portfolio is also the best long term performer (up 89.3 percent vs. -12.9% for the S&P since July 15, 2003). The table below shows the performance of the 10-stock portfolios I run over the last 30 days.

Advisor Perspectives turns out another good interview, this time with Fairholme Fund manager Bruce Berkowitz. Berkowitz’s leadership has helped turn the Fairholme Fund into one of the most successful funds around.