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StockStrategistRaiseAlarmUnanimousCall for Rally
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lg_6273
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18-Dec-2006 21:24
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Stock Strategists Raise Alarms With Unanimous Call for Rally By Daniel Hauck Dec. 18 (Bloomberg) -- Strategists at 12 of the biggest Wall Street firms agree that U.S. stocks will rally next year. The last year that happened was for 2001, when the Standard & Poor's 500 Index dropped 13 percent. Merrill Lynch & Co.'s Richard Bernstein and Bear Stearns & Co.'s Francois Trahan, two of the most bearish forecasters in the current four-year rally, both estimate the S&P 500 will surge to a record next year. The unanimous view among the strategists tracked by Bloomberg that have made 2007 forecasts is just one signal of growing complacency about the market. An option-based index of investor concern dropped to a 13-year low last week, when the S&P 500 rose to its highest since November 2000. A survey of newsletter writers showed the least pessimism this year. ``Everybody lining up in the bull camp makes me more than a little nervous, and I was nervous anyway,'' said Malcolm Polley, who helps manage $1.3 billion as president of Stewart Capital Advisors in Indiana, Pennsylvania. ``There are enough potential pitfalls to take us to the downside.'' Polley said he's finding few stocks worth buying now. Slower earnings and economic growth are among them. This quarter may be the first one since 2003 that profits at S&P 500 companies will fall short of a 10 percent increase, according to analysts surveyed by Thomson Financial. Economists expect a U.S. slowdown to last into the first half of 2007, according to a Bloomberg News survey published last week. The S&P 500 added 1.2 percent for the week to 1427.09, a level not seen since Nov. 7, 2000. The Dow Jones Industrial Average rose 1.1 percent to a record 12,445.52. The Nasdaq Composite Index gained 0.8 percent to 2457.20. Inflation Report Strategist Tobias Levkovich of Citigroup Investment Research raised his 2007 forecast for the S&P 500 to 1600 last week. He matched Ed Keon of Prudential Equity Group LLC as Wall Street's most bullish forecaster. The average estimate of the 12 strategists is 1533, above the index's record of 1527.46 on March 24, 2000. The projection amounts to a 7.4 percent advance from last week's close, in line with their forecast of an 8.2 percent increase in 2006. This year, the index has risen 14 percent. An inflation report tomorrow may help determine whether stocks extend the gain. Prices paid to factories, farmers and other producers probably rose 0.6 percent in November after sliding 1.6 percent in October, according to the median estimate in a survey of economists by Bloomberg News. Speculation that the Federal Reserve will keep inflation in check without stalling the economy helped the S&P 500 advance 17 percent gain from its 2006 low on June 13. Consumer prices were unchanged in November, the Labor Department said last week. `Too Conservative' The index's gain this year may exceed the average forecast of strategists for the third time in four years. They predicted a 16 percent climb in 2003, when the S&P 500 rallied 26 percent. They foresaw gains of about 3 percent in 2004, when the gauge added 9 percent, and last year, when the estimate was on target. ``Strategists have been a little bit too conservative,'' said Laszlo Birinyi, president of Birinyi Associates Inc. in Westport, Connecticut. ``They look at the historical trends, and this far out in a bull market and an expanding economy you don't tend to see very strong markets.'' Birinyi's research and investment firm oversees $300 million. The last time Wall Street unanimously predicted an advance for the S&P 500, in 2001, preceded a 33 percent slump over the next two years. The U.S. economy fell into recession and the Sept. 11 attacks battered financial markets. `People Are Bullish' Bernstein and Trahan both expect investors to pay more for each dollar of earnings at S&P 500 companies next year, sending stocks higher. They have been top ranked for portfolio strategy in the last three fund-manager surveys by Institutional Investor magazine. Bernstein won in 2004 and Trahan the past two years. ``People are bullish, and the strategists are too,'' Bernstein, 48, said in an interview. ``We all are.'' The New York-based forecaster expects the index to reach 1570, up 10 percent from its current level, in the next 12 months. Bernstein, who was named Merrill's chief U.S. investment strategist in December 2001, called for the S&P 500 to drop in three of the past four years and predicted the index would be little changed in 2005. Trahan, 37, began this year calling for the index to reach 1350. He cut his estimate in May to 1200, the most bearish year- end forecast, on concern the Fed's interest-rate increases would weigh on the economy. The New York-based analyst forecast the index would be little changed in 2004 and 2005. Volatility Falls For next year, Trahan expects stocks to rally as investors foresee an accelerating economy. He raised his S&P 500 forecast by 6.9 percent, to 1550, on Oct. 10 and wrote that the index's price-to-earnings ratio might rise 2 points or more next year. The S&P 500 is valued at 17.9 times earnings. Option investors may share the strategists' optimism. The Chicago Board Options Exchange's SPX Volatility Index, or VIX, slid last week to 9.39, a level not seen since December 1993. The VIX is based on S&P 500 option prices. Lower readings indicate less concern about the market's prospects. Financial newsletter writers are also sanguine, according to a survey by Investors Intelligence. Pessimistic advisers fell in the week ended Dec. 8 to 21.3 percent, the lowest reading in 2006. The level of bullish writers was 59.6 percent, near this year's high of 59.8 percent, reached a week earlier. Yet earnings growth is decelerating. Analysts project that S&P 500 companies' fourth-quarter profit will rise 9.9 percent, down from 12.8 percent at the start of October, according to Thomson. They expect expansion of 8.7 percent in the first quarter of 2007 and 6.7 percent in the April-to-June period. `The Opposite Happens' The lack of dissent among strategists has caught the attention of some investors. Since the current bull market began in October 2002, at least two strategists every year have estimated declines for the S&P 500 in their annual forecasts. ``I'm an old believer that when everyone believes something is going to happen, the opposite happens,'' said David Kotok, who oversees $850 million as chief investment officer at Cumberland Advisors Inc. in Vineland, New Jersey. ``That causes me concern because I'm bullish too.'' By the Numbers The following table shows the S&P 500 forecasts for 2007 from all 12 strategists surveyed. Firm Strategist Forecast* ================================================================ Banc of America Thomas McManus 1465 Bear Stearns Francois Trahan 1550 Citigroup Tobias Levkovich 1600 Deutsche Bank Binky Chadha 1540 Goldman Sachs Abby Cohen 1550 JPMorgan Chase A. Chakrabortti 1440 Merrill Lynch R. Bernstein 1570 Morgan Stanley Henry McVey 1525 Prudential Edward Keon 1600 Strategas Jason Trennert 1550 UBS David Bianco 1500 Wachovia Rod Smyth 1500 ---------------------------------------------------------------- Average 1532.5 * Year end or 12-month forecast To contact the reporter on this story: Daniel Hauck in New York at dhauck1@bloomberg.net Last Updated: December 17, 2006 19:03 EST |
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