Lehman, Deutsche Bank Strategists Predict Best 6 Months for S&P Since 1982

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Since I seldom am the bearer of upbeat news, I thought I’d pass along the cheery forecast from market strategists at Lehman and Deutsche Bank, namely, that the Standard & Poor’s 500 index will have its best six months since the second half on 1982 in the second half of 2008.

I happen to remember that period. The markets had been though a grinding loss of faith in securities, not just stocks. Philip Brothers, a commodities broker, had bought the storied Salomon Brothers; Goldman had done a reactive deal, a purchase of a commodities trader, J. Aron, which turned out to be a horrifically bad deal on any cashflow analysis (commodities went promptly into retreat shortly after the deal was concluded; J. Aron was soon hemorrhaging cash and pink slips) but in the very long term helped Goldman’s strategic position. The few fixed corporate bond deals being done were at coupons of over 15%. Similarly, very few equity issues were being done (who would want to sell stock at such low multiples?).

It on a specific day in August that thinks turned, I think August 12, that word went through Goldman like wildfire that the bear market was over. Sadly, I don’t recall the trigger for this change in sentiment (it preceded Volcker’s relenting on his dose of high interest rates, which occurred in October 1982).

The Bloomberg piece is skeptical of these forecasts, as am I based on my recollections of the reference period. Markets and sentiment are no where near as ground down as they were then. The S&P 500 earnings multiple was around 10. And given how weak the economy had been, there was ample room for both earnings improvement as well as multiple expansion (click to enlarge).

But hey, I could be all wet. And another Bloomberg story points to a bullish indicator: record short interest. High levels of shorting means an improvement in stock prices can gain strong momentum from short covering.

From Bloomberg:

Deutsche Bank AG, Lehman Brothers Holdings Inc. and UBS AG say the Standard & Poor’s 500 Index will gain the most in 26 years during this year’s second half. That isn’t going to happen, if history is any guide.

The S&P 500 will rise 18 percent by January, according to the consensus projection of 10 U.S. strategists surveyed by Bloomberg. The forecasts are based partly on estimates that profits will jump 50 percent in the fourth quarter after falling for the past year.

Even if that happens, it may not be enough. In 2001, the last time profits fell as much, they then had to climb for three straight quarters before stocks rebounded. Analysts’ earnings estimates for this year still represent a decline from 2006 levels, making the strategists’ optimism harder to justify, investors say.

“If they’re accurate, I’ll give them a big kiss,” said Randy Bateman, who oversees $15 billion as chief investment officer at Huntington Bancshares Inc. in Columbus, Ohio. “I don’t think those are very realistic figures.”

The S&P 500 dropped 1.2 percent last week to 1,262.90, coming within a percentage point of a “bear market,” defined as a 20 percent plummet from its peak in October. Based on the index’s closing price of 1,280 on June 30, the average strategist forecast of 1,515 by year-end calls for the biggest rally of any second half for the S&P 500 since Ronald Reagan was in the White House in 1982….

Strategists at Deutsche Bank, Lehman Brothers and UBS are the most bullish and expect the benchmark for American equities to climb to a record in the second half. Binky Chadha, Deutsche Bank’s New York-based chief strategist, says the S&P 500 will end the year at 1,650, up 29 percent from June 30.

Ian Scott, Lehman’s global strategist, is predicting an advance of 27 percent to 1,630, while David Bianco at UBS says the index will increase at least 25 percent.

The S&P 500’s rebound “is going to be one of the greatest roars we’ve seen,” Bianco said. “The market has way too many fears baked into the valuation right now. The fear out there is the earnings are about to collapse and interest rates are about to surge on inflationary fears. Neither is going to happen.”

Strategists’ annual forecasts have been off by an average of 14 percentage points since 2000, according to data compiled by Bloomberg. They haven’t projected an annual decline in at least eight years

At the start of the year, strategists told clients to expect an average 11 percent advance in the S&P 500 in 2008 to 1,634, Bloomberg data show. The measure has dropped 14 percent so far.

“A monkey with an abacus is probably better at the end of the day,” said Peter Sorrentino, a Cincinnati-based senior money manager at Huntington Asset Advisors, which oversees $16.7 billion. “To read the strategists’ input is intriguing and thought-provoking, but at the end of the day, you’d better have your own tools. We’re nowhere near as optimistic as some of the forecasts.”…

Abhijit Chakrabortti, chief global equity strategist at Morgan Stanley, wrote in a report today that the S&P 500 is still too high relative to earnings and may decline as much as 8.9 percent to 1,150 if inflation accelerates. Merrill Lynch & Co.’s Richard Bernstein expects the index to rise to 1,400 in the next 12 months, according to a July 3 note to clients…

Profits at S&P 500 companies fell for three straight quarters and are estimated to have dropped 11.2 percent in the second quarter, according to data compiled by Bloomberg. Four consecutive periods of declines would be the most since the last recession in 2001….

“Earnings in a lot of sectors should look good,” said James Swanson, Boston-based chief investment strategist at MFS Investment Management, which oversees $204 billion. He expects the S&P 500 to gain 23 percent to 1,580 by Dec. 31. “Financials should be making money again. There’s certainly a lot of wreckage now, but there are bargains out there.”…

Shares may still drop even after earnings recover, which is what happened during the last recession. The S&P 500 lost 13 percent during the five quarters of profit declines between 2001 and 2002. In the last three quarters of 2002, when earnings increased again, the index fell a further 23 percent.

“There’s always going to be ebbs and flows in the economy, but we believe that this is a start of a significant bear market,” David Tice, founder of the $1.2 billion Prudent Bear Fund, said on Bloomberg Television. “We are going to pay the price for it with much lower stock prices.”

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  1. Anonymous

    In 1982 we were looking at increased oil production from North Sea and Alaska. Energy prices declined. Not going to happen this time around.

    Economists and financial types are like the rooster who thinks his crowing makes the sun rise.

  2. theinvestingspeculator

    These banks sound like the Bulls I listen to. I don’t see how growth is going to turn around or how inflation is going to stop going up. Growth is down, inflations is up all over the world. I did a chart of inflation rates @

  3. Michael McKinlay

    Could happen!

    Investors are desperate. Should oil drop below $120 it would be very bullish for stocks.

    The problem is that that drop in oil means even more demand destruction. Bear markets are not known as stable markets and the whipsaws we see will be treacherous.

    Unfortunately the oil story gets worse, not better. As soon as economic activity picks back up oil again skyrockets, creating a see saw effect on the economy and the stock market on its way to even lower lows in the long term.

  4. S

    Should oil drop below $120 it would be very bullish for stocks

    why would a drop to 120 mean anything. Corportate margins are still based on 60 dollar oil. So a 120 point estimate is double in the grand scheme of things. Permanently higher oil is by definition a structural shift up in the cost curve for US industry. That isn’t even close to being priced into stocks.

    How anyone can conclude that stocks are cheap is merely self delusion. What is cheap anyway. Kind of like stocks are oversold. been saying that since the top, no. Bake in lower margins, structurally higher interest rates and those miraculous DCFs churn out very different targets, even with an emerging market bump.

  5. Doc Holiday

    Yves, Kinda OT, but I found this interesting this morning and just wanted to share:

    Federal Home Loan Bank of Chicago · 10-Q · For 3/31/08

    On April 24, 2008, we received a letter from the Director of the Office of Supervision of the Finance Board (“OS Director”) denying our request to redeem capital stock totaling $8 million in connection with seven membership withdrawals or other terminations.

  6. Doc Holiday

    Yah know me, I love beating OT horses:

    Re: denying our request to redeem capital stock totaling $8 million…

    The FHLB Chicago strives to be a valuable partner to our member financial institutions in Illinois and Wisconsin during all phases of financial and economic cycles.

    The Federal Home Loan Bank of Chicago will discontinue purchasing mortgage loans under the MPF Program effective July 31, 2008 and currently is no longer offering new or renewed master commitments.

    Re: http://www.bizjournals.com/milwaukee/stories/2008/03/24/story1.html
    Harris Bank hungry for expansion

    Acquiring one of the state’s largest banks in Associated — rather than a series of small community banks — would be a quick way for Harris Bank to grow in Wisconsin, said John Kielich, managing director of Kolb & Co. Corporate Finance in Brookfield. Harris has about $41 billion in U.S. assets and $21 billion in market capitalization.

    Re: Bank of Montreal/Banque de Montréal (TSX: BMO, NYSE: BMO) is Canada’s fourth largest bank[1], and is classified as a Domestic Chartered Bank (Schedule I). It also has substantial operations in the Chicago area and elsewhere in the United States, where it uses the Harris name. Bank of Montreal was founded in 1817, making it Canada’s oldest bank. It operates under the corporate brand BMO Financial Group

    I’m sure you hate this, but…. just curious

  7. Anonymous

    Oil-company shares will stay strong but “large swaths of the stock market” will be swamped in an “increasingly stagflationary” environment, CIBC World Markets (TSX:CM) chief strategist Jeff Rubin said Monday.
    Rubin reeled in his outlook for the overall market, cutting his year-end forecast for the S&P/TSX composite index by six per cent, to 14,300 from 15,200. The index was at about 13,700 Monday afternoon amid a triple-point loss on the day.
    The threat of stagflation – negligible or negative growth while prices surge upward – is tied to the price of energy, Rubin said.
    “I think the real threat to the economy is not the subprime mortgage market and the fallout from that,” he said.
    “I think the main event for Main Street is $200 (a barrel) oil” – which he predicts will come in 2010 after an average oil price of US$150 per barrel in 2009.

  8. Anonymous

    The trigger for the beginning of the bull in 1982 was Kaufman’s call for the end of rising interest rates. I was celebrating my 1 year anniversary of being a stockbroker and was trying to get clients to buy San Diego G&E bonds with a current yield of 18 5/8% selling at a tiny discount to face value because I sure couldn’t get any of my clients to buy stock in anything. How funny.

  9. Jojo

    Anyone can make predictions. Wasn’t CNBC and big media touting how the FED had saved the world, the upcoming stimulus checks would be a great help to the market and basically, everything was turning rosy back in March/April?

    Today on CNBC, UBS trotted out someone to say that the S&P would gain 25% in the 2nd half of 2008!

    Unfortunately, there is little or no penalty for predicting wrong. In fact, from the perspective of Wall Street, whether buyers make or loss money doesn’t matter. THEY make money on transaction costs regardless of whether their predictions are right or wrong. Their goal is more transactions, period..

    I think Wall Street is getting desperate, so they are putting on a full court press, holding a carrot out (this is the bottom and you don’t want to miss it, right?), hoping to motivate some buyers. All the usual suspects will be on board because after all, CNBC and newsletter writers don’t make any money if Wall Street cuts back.

  10. Anonymous

    I don’t remember the day but I remember the event. When the Dow broke 1,000 the head of equities for Pain Webber got on the squawk box and screamed: “Buy, Buy, Buy, I don’t care what it is just tell your customers to buy, buy, buy.

    At that time I was selling the 14’s of 11 at a deep discount to anyone who would touch them. It was the best trade in my life.

    I don’t see any reason for the market to soar other than some 20 year old kids oversold computer model, but having been in the markets in the 70’s that model will remain oversold for years without a major rally.

  11. Michael McKinlay

    S said…

    I didn’t say $120 was going to change the economic equation a lot … I said :

    Should oil drop below $120 it would be very bullish for stocks.

    And I also said that the Bear Market would have wide swings but that the long term direction was lower from here.

    Just remember ” A fool and his money are soon parted ” and that’s what you have in this market.

  12. Anonymous

    Re: mkt trends:

    “… the consolidation has formed at the overall lows of the very bearish downtrend, which began in mid May. This type of behavior is very indicative of more weakness ahead…”

  13. Anonymous

    The market has one job and one job only and that is to take the most amount of money from the most amount of people in the least amount of time. Place your bets please.

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