These bullet points were from a (much longer) Merrill Lynch research piece last week.

“With most of our market indicators flashing green, we address the bear cases below to either debunk them or provide evidence that the risks are priced into stocks.”

1. “The 5-year bull market is long in the tooth”
2. “Everybody’s bullish – it’s time to sell”
3. “Valuations are too high”
4. ”Margins are peaked and poised to collapse”
5. “Higher rates are bad for equities”
6. “The Fed is about to take the punch bowl away”
7. “Europe continues to ail”
8. “China is a disaster waiting to happen”
9. “Dysfunction in Washington DC is spiraling out of control”
10. “Geopolitical tensions are running high”

They then proceed to make a good effort taking each of these items apart.

I cannot post the PDF as its copyrighted work product — but you should dig up a copy . . .



2014: Debunking the bear case
Savita Subramanian
BAML Equity and Quant Strategy
26 November 2013

Category: Analysts, Investing, Psychology

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.

20 Responses to “Debunking the Bear Case”

  1. jnkowens says:

    The thing I remember most about the late 90′s bubble, was that I frequented the discussion boards at and anytime someone posted a comment questioning valuations, the “crowd” would just pummel that person as a naysaying, luddite moron. There is a whiff of that in the air these days.

    Lot’s of articles refuting the bear case, which is not quite the same thing as making a bull case as well.

    The case being made by Grantham, Mauldin, Hussman, Shiller, etc. seems straightforward and simple in an Occam’s Razor kind of way.

    • Those 4 are very different cases:

      -Grantham is looking at 10 year returns;
      -Hussman has been beating the same drum (incorrectly I might add) for 4 years;
      -Shiller (if you read what he said) repeatedly stated stocks are in danger of will eventually becoming bubbly, but we are not there yet.
      -Mauldin is more political than financial

      No name calling — just biased interpretation and lots of confirmation bias on the part of today’s bears.

      • jnkowens says:

        I totally disagree that the cases are different. Their cases each come down to the same principle – that this is purely a QE driven rally, and beyond that the fundamental case for owning stocks is stretched thin.
        Having said that, I personally don’t think the market is bubbly or crazily valued. Just saying that I am starting to notice a real mob mentality toward the bear case, and I find that worrisome.

      • Angryman1 says:

        jn, the problem is QE has little to do with this rally. Capital is optimistic and it is now showing up in production reports as increased investment.

        QE is likely done by this spring in total. What will you say when the market keeps on going up?

        Heck, even I am surprised by the economic strength as of late.

      • john farmer says:

        From an interview with Jeremy Siegel today:

        I have a lot of problems with the CAPE predictions using S&P data, but not with the CAPE methodology. The CAPE methodology is brilliant and works. The data are the problem. I showed that the S&P 500 earnings data over the last 15 to 20 years, particularly in recessions, have been much different that prior to that, primarily due to the change in accounting conventions and the forced write-downs of assets. When I looked back at the historical data, S&P earnings compared to the business cycle, it was like night and day. You are not dealing with the same series.

        I used the corporate profits from the National Income and Products Account (NIPA) data and plugged them in. Guess what? The Shiller overvaluation almost completely disappeared. And the cyclical behavior of the NIPA data is very consistent with the business cycle over the last 85 years.

        When you normalize for the data, the market is not overvalued by much at all. Because Shiller’s CAPE is based on the average of the last 10 years, the crash in earnings during those recessions really pumped up the CAPE ratio, and that is a major, major reason for today’s over-valuation.

      • BenGraham says:

        BR, please elaborate. You are accusing 3 (Grantham, Hussman, Shiller) of confirmation bias when they have been 3 of the most accurate cycle forecasters around. They present fundamental CAUSAL reasons why the bull is stretched. What is your reason for saying they are wrong? Are margins destined to stay at record highs or go higher? Or do you think measurement of margins is in error? Are valuations cheap and have room to run? Or just not extreme enough? Are sales robust and you expect them to get better? Are you bullish because you think there is another 10%, 20%, 50%??? Yes, you’ve been ‘right’ this year, but that could be luck for all we know. Without an explanation, we don’t know. Care to explain why you are (still) so confidently bullish?

      • Not them — the commenter!

      • profoundlogic says:

        No, these are not 4 very different cases. They are people trying to warn you that the markets are not operating on fundamentals. The fact that you seem to ignore the almost perfect correlation of the Fed’s balance sheet expansion with the subsequent levitation of the markets is quite telling. Correlation may not be causation, but multiple expansion and margin extraction will only get you so far. These guys are warning people that the fundamentals are out of whack… because they are! Take away that $85 billion per month in POMO and the party ends. Period. End of story. Until we get back to real markets and fundamental asset valuation, everything else is just an exercise in monetary misadventures. For Christ’s sake! Any fool could throw a dart board at the S&P while the Fed is dropping money at these volumes into the system. You don’t need financial advisor when the Fed is hell-bent on levitating the stock market. You need someone who can tell you when the party is ending…before it’s actually over!

  2. SkepticalOx says:

    And to add to BR’s response, Grantham in his latest letter also stated that stocks could well go up by another 20 – 30% in the next few years.

    There’s still a lot of people I hear yelling bubble, so it doesn’t feel like full euphoria mode yet (like in 1999, or even the housing market in mid-2000′s). But that’s just my take.

  3. dctodd27 says:

    - GMO looks at seven year returns (sorry – a minor correction).
    - While one can certainly take issue with Hussman’s execution, his forecasts for the broad market have been spot on. There is a difference.
    - Shiller says CAPE of 25 is not a bubble, but a CAPE of 28 is…I don’t get it.
    - No comment on Mauldin (just to round out the four)

    • rd says:

      I think I get where Shiller is coming from.

      Historically, there have been several periods when CAPE was in the 20-25 range. The stock market tended to be a reflection of what was going on the economy with some overshoot on both ends. In the 20-25 range, a few years of decent GDP and earnings growth can let the fundamentals catch up to the pricing.

      However, when CAPE got up in the range of 28 or higher (1929, 2000, 2007) the stock market tended to have separated from underlying realities and at least some of the major stock sectors had buyers using massive margin (1929), were massively overpriced based on known fundamentals (Nasdaq 2000), or had opaque earnngs that turned out to be illusory for major sectors (financials 2007). As a result, stock prices in the bubbly sectors would start to cascade quickly with many of the major companies going bankrupt or becoming a shell of themselves as their poor fundamentals and collapsing funding fed on each other. The sectors that were massively over-valued usually take decades to recoup their losses from such a crash.

      An excellent example is 2000 where the S&P 500 CAPE was largely driven by the tech companies. Value-oriented funds that were buying other sectors only lost 20%-30% in that bear market while many funds that were predominantly tech companies lost 80%+. The NASDAQ is still not back near its 2000 peak.

      We have continued slow GDP and employment growth today so some stock market advances make sense but it has been bizarre to see the S&P 500 leap so much ahead this year without stellar GDP, employment, revenue or earnings growth. I agree with Shiller that we are at somewhat of a crossroads – the S&P 500 either slows down a lot to let fundamentals catch up or we start to move into bubble territory driven by sentiment instead of numbers.

  4. LeftCoastIndependent says:

    The bears will be right, sooner or later. Just don’t get caught with your pants down. Watch Japan. The SHTF will probably start there which will be the worldwide trigger. Just my take.

  5. catman says:

    I will comment on Mauldin. Gack. I just spit up a hairball. Br has it right – political entertainment at best.

  6. czyz99 says:

    Mauldin was selling stem cell skin creme. Says all you need to know. And it didn’t help much: scary looking dude. Willem Defoe comes to mind.

  7. tradeking13 says:

    None of the bull or bear cases amount to a hill of beans. We are in uncharted waters with ZIRP4EVA and QE-∞.

  8. b_thunder says:

    2014: Debunking the bear case
    Savita Subramanian
    BAML Equity and Quant Strategy

    Strategy? So it’s written and/or commissioned by a “strategist” like the (in)famous A.J. Cohen from GS? Ok, the research may be 100% spot on, time will tell.
    Question: is there anyone else reading the Big Picture blog who, like me, considers Wall St.”strategists” to be just a bunch of glorified salespeople? Does anyone think that AJ Cohen will ever forecast anything less than +8% for S&P500 for every single “next year?”

  9. Angryman1 says:

    All “Bears” will be right eventually, but that doesn’t help me make any money. If they are right in 6 years, that is a long long time.

  10. Frilton Miedman says:

    Devils advocate,

    Is this the same Merrill that almost went belly up in 2008 for not seeing the sub-prime CDO crisis?

    As for the list, one reasonable point is #3, blandly reiterating “valuations are high” is just parroted group-think if you’re not offering a detailed analysis of why.(I say the same for P/E’s)

    Valuations are subject to supply & demand, supply is good, but demand hinges on the consumer, demand.

    The consumer is 105% household debt to income, wages are at 1989 adjusted levels, leaving consumer debt as the fuel for consumption without the wages, which leads to #5, higher rates in an environment where the consumer is borrowing in a lack of wage growth or improvement in employment.

    On the plus side, mortgage & debt servicing payments have been reduced dramatically since 2006, putting a huge amount of extra money in the hands of households – but how long can that continue?

    One thing for sure, the last five years is going to be in the books, one way or another, as a guideline for what to do, or not, in monetary policy vs fiscal.

  11. neddyj says:

    the herd of wall street forecasters is bullish right now, so there will be lots of reports like this one almost 5 years after the big rally began. i wonder if anyone can dig up a ‘debunking the bears’ from early 2009? Probably quite a few ‘debunking the bulls’ around then….or just an awful lot of silence.

    these guys have no idea what happens in the next ___________(insert period of time here).

    We could keep going up here since that’s been the trend. it won’t be because of reasonable valuations or because the bullish sentiment hasn’t gotten high enough or because we’re in a bubble that’s continuing to inflate. when the market does finally turn south everyone will point to an indicator that was predicting it that should have been clear as day to everyone. could happen next month. could happen a couple of years from now. who knows? not merrill lynch. or goldman sachs. or john hussman.

  12. BenGraham says:

    John Farmer-

    Two points:
    1. Let’s put this CAPE thing to rest. Go to Shiller’s website and download the data for yourself.
    Go back and DELETE the data from Jan-2008 through Dec-2009, which is clearly the trough in earnings. The Shiller CAPE goes from 25 to 22.8. Wow…now I’m a bull because we’re only at the bottom of the worst decile and not the top. How exciting. (Still wildly overvalued). Oh, and that trailing measurement does NOT include the 2001-03 trough in earnings, so it ONLY includes the best years!

    2. Siegel is an uber-bull. Never bearish, ever. Stopped clocks are right twice a day too. And his entire argument is based on the logical fallacy of special pleading or “this time is different”, if I just back out this bad data…. How many times do investors need to hear that to be convinced it isn’t different? Plus, if you take price/sales, price/book, marketcap-to-gdp or any RELIABLE valuation method, the result is the same- overvaluation.