Two reports from different wirehouses caught my eye yesterday due to their amazing Yin and Yang nature.

First up, the always excellent Equity & Quant Strategist at BAML, Savita Subramanian (the Yin), issued a report titled Wall St. Proclaims the Death of Equities. The report discusses the firm’s proprietary sell-side indicator, which has reached near record levels of bearishness, which is of course bullish for stocks. So much so that its current level implies a 12-month S&P500 target of 1665. (It should be noted that the indicator’s focus is equity allocation: It “is based on the average recommended equity allocation of Wall Street strategists as of the last business day of each month. We have found that Wall Street’s consensus equity allocation has historically been a reliable contrary indicator.”) Although it’s about equity allocation, bear with me here.

Here’s a look at the chart. (Note that 1665 is not BAML’s official S&P target – it is the implied target based on this one indicator, not the firm’s official position.)

No sooner had I read that report when, lo and behold, I come across a piece of research from UBS’ estimable Chief Strategist Jonathan Golub (the Yang) who, as if on cue, sliced his S&P500 forecast by 100 down to 1375 and shaved $1.50 off his S&P earnings, down to $103.50. (I am, perhaps a bit unfairly, construing Mr. Golub’s call as effectively the equivalent of a reduction in equity allocation. As he’s cut his target by 6.7% and called for the remainder of the year to be flat, I don’t think that’s too much of a stretch.)

Said Mr. Golub:

We are lowering our S&P 500 year-end target to 1,375 from 1,475 on three main catalysts: (1) deterioration in incoming U.S. economic data; (2) the Supreme Court’s healthcare ruling, which we believe will contribute to greater partisanship ahead of year-end fiscal discussions; and (3) a more contentious tone among European policymakers, despite some success at the most recent Euro summit.

We are lowering our S&P 500 earnings estimates for 2012 to $103.50 from $105, and for 2013 to $110 from $113. Our lowered estimates reflect moderate U.S. GDP, weaker non-U.S. growth, additional dollar strength, and a more difficult operating environment for Financials.

And an interesting chart from Mr. Golub:

As the exhibit below highlights, the vast majority of market’s rebound was achieved in the early days of the recovery as a result of earnings strength and a re-rating of multiples from depressed levels. By contrast, the market’s 12% rise over the past two years has been characterized by flatter returns with greater volatility.

If there’s been a better example of research Yin and Yang, I can’t remember what it was. Fascinating stuff from two great strategists.

Finally, I’ll note that I’m starting to see a real divergence of opinion opening up on where markets are headed, this being the most recent – and obviously glaring – example. It will be interesting to watch it all play out.



Category: Analysts, Data Analysis, Earnings, Investing, Markets, Research

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

9 Responses to “The Occasional Yin and Yang of Research”

  1. whodunit says:

    Chart Comment

    This chart analysis is flawed. A chart showing the 66-82 bear market period is needed. 1985-2000 is in a secular bull market. It would be interesting to see in the last secular bear , when the indicator reached ” the death of equities” level, and how long it stayed there, and what the S&P did. When looking at things like this over long terms, it is important to understand comparing things from a secular bull market period, may not mean the same in a secular bear.

    I am happy to see the current level on the chart, but am very interested to see a chart of the last secular bear for proper comparison.

  2. Winston Munn says:

    Looks like a good example of the Heisenberg Market Uncertainty Principle: if you know the market level now, you cannot also know where it is going.

  3. dougc says:

    The future is unknowable and the past is debatable.

  4. Scott Frew says:

    So Mr. I, we see the range of divergent opinions goes from market up 20+ percent, that opinion based apparently upon overall bearish sentiment, to market flattish. I see what SS is getting at–that does look pretty dark!


    Invictus: Hey, Scott. In fairness to SS, I think what she’s looking at is where equity strategists have been generally taking their allocations (i.e. lower), and that’s why her indicator is now so negative. Have to say, I can’t recall seeing any recent hikes in equity allocations.

  5. whodunit says:

    The point I made is in fact a good point, comparing this chart to another bear market set of data, and would provide a deeper analysis.

    Ahhh, what a revelation, and provides so much to the discussion

    Have a good holiday Best………..

  6. rocketgas says:

    If you put two economists in the Large Hadron Collider and smashed them together what would you find?

  7. Scott Frew says:

    I: Yeah, I was just kidding around. That said, the view that there’s a lot of bearishness seems ludicrous on its face. I haven’t kept the count, but I believe it was Jeff Saut, hardly a bear himself, who noted toward the end of June that 70% of recent marcro data had come in worse than expected and down m/m, and yet June was a nicely positive month. To paraphrase the work of a really smart guy, who’s been pretty much spot on and way out in front of all the major developments over the last several years, but who would insist on anonymity in this forum, ask yourself why ISM new orders just fell by their largest amount in over ten years, and why the only two sub-indices in China’s PMI that were up were output and inventories; why iron ore and coal inventories in China continue to get larger, while hot rolled coil and rebar prices continue their downward path. The market’s reaction to all of these developments is either to ignore them or to regard them as good news, insofar as that means central bankers, who are apparently pretty good at this stuff, all evidence of the last 15 years to the contrary, have our backs, and will not let markets fall. Strategists may not be raising their equity allocations, but tell me how many project markets going lower from here. And while you’re at it, let me know what the growth drivers for the real economy are at the moment.

    Happy 4th.


  8. wngoju says:

    I – Nice, much appreciated, keep up good work, etc.

    A request – More positive info for tomorrow. :-)

  9. algernon32 says:

    If Bidermans observation that liquidity rather than value sets equity prices is entertained…

    The high frequency trading houses are providing 50 to 80% of daily liquidity …

    The HFT houses are trading around a zero position, and are essentially price agnostic…
    …and trade across multiple asset classes simultaneously, making everything eerily correlated…
    …and will pull liquidity if conditions are outside of their models ability to profit in the next 1/20 of a second…

    The price stickyness of years gone by is only a memory now.
    This behavior is unnerving to human market participants.
    Retail outflow from equities show humans voting with their feet to the calmer waters of bonds and cash.