Economic Calendar

Monday, November 10, 2008

Believing in Estimates Means 20% Advance for S&P 500

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By Eric Martin and Elizabeth Campbell

Nov. 10 (Bloomberg) -- Even after cutting estimates at the fastest rate ever, Wall Street strategists still need the biggest year-end rally in the Standard & Poor's 500 Index for their forecasts to come true.

David Kostin of Goldman Sachs Group Inc. predicts an advance because U.S. companies are cheap relative to earnings. Strategas Research Partners' Jason Trennert is counting on a resumption in bank lending to lift equities. Thomas Lee at JPMorgan Chase & Co. says stocks are swinging so much that a 25 percent jump by Dec. 31 isn't out of the question.

Strategists were also calling for a record gain at this time last year, after the first quarterly decline in corporate profits dragged the S&P 500 down from its high of 1,565.15 on Oct. 9. It never materialized and stocks have dropped 41 percent since.

``It's very difficult for us to see that kind of turnaround by year end,'' said Richard Weiss, who oversees $53 billion as chief investment officer at City National Bank in Beverly Hills, California. ``The stock market would need to see a bottoming of this economic cycle, and that is nowhere in sight.''

The S&P 500 is poised for its worst year since the 1930s after almost $700 billion in bank losses froze credit markets and spurred concern the economy will shrink. U.S. equities posted the steepest monthly loss in 21 years in October and $6 trillion was erased from U.S. markets in 2008.

Biggest Bears

Futures on the S&P 500 expiring in December gained 2.7 percent to 961.60 at 5:47 a.m. New York time after China unveiled a $586 billion economic stimulus package and the Group of 20 nations urged central banks to cut interest rates.

Kostin, Trennert and Lee are among the most pessimistic of Wall Street strategists with year-end estimates tracked by Bloomberg. The three expect the benchmark for American equities to end 2008 at an average of 1,075, up 15 percent from its closing level last week.

``I wouldn't call it extremely bullish,'' said New York- based Lee, who says the S&P 500 may rise to 1,125. ``The high level of volatility means you're going to have a pretty wide range of possible outcomes.''

The average Wall Street forecast calls for the S&P 500 to break out of a bear market and surge 20 percent to 1,118 by Dec. 31 -- more than twice as much as the biggest-ever advance to close out a year, according to data compiled by Bloomberg. Strategists were even more bullish at the beginning of the year, predicting that the S&P 500 would end 2008 at a record 1,632.

`A Stretch'

Since then, they've slashed their projections after failing to foresee the biggest financial crisis since the Great Depression. Strategists cut their forecasts about 28 percent this year, while the S&P 500 lost 37 percent.

``Even a 15 percent gain could be a stretch,'' said Robert Doll, who helps manage $1.3 trillion as chief investment officer for BlackRock Inc. in Plainsboro, New Jersey. ``My guess is from here to the end of the year we do have another rally, but confined inside a narrower trading range.''

Goldman's Kostin reduced his S&P 500 prediction by 29 percent on Oct. 13 to 1,000, saying economies around the world deteriorated and oil prices slid faster than he expected.

Still, Kostin expects the S&P 500 to hit bottom this month and rebound as investors buy shares that are inexpensive compared with companies' forecast profit. A Goldman spokeswoman said Kostin declined to comment.

The S&P 500 trades at 10.39 times next year's estimated earnings from continuing operations, compared with the weekly average of 21.1 times historical operating profit over the past decade, according to data compiled by Bloomberg.

Borrowing Costs

JPMorgan's Lee, who started the year with an S&P 500 estimate of 1,590, lowered his projection of 1,375 last month by a further 18 percent. The 1,125 forecast still implies an advance of 21 percent through the end of the year.

Trennert expects the S&P 500 to increase 18 percent to 1,100, even after cutting his estimate twice between the end of September and mid-October. He says stocks will rebound as borrowing costs fall.

``The market discounted what we believe will be a recession in 2009'' when it reached a five-year low of 848.92 on Oct. 27, Trennert said.

The strategist who cut his projection the most since September was Deutsche Bank AG's Binky Chadha. Chadha abandoned his year-end call for the S&P 500 to reach 1,350, decreasing it on Nov. 7 to as low as 800 and becoming the first strategist to acknowledge the possibility that stocks may fall for the rest of the year. Chadha, previously one of Wall Street's biggest bulls, declined to comment through spokeswoman Renee Calabro.

Fair Value

Merrill Lynch & Co.'s Richard Bernstein also reduced his forecast last week. Bernstein, Merrill's chief quantitative strategist, cut his 12-month projection for the S&P 500 to 1,047 from 1,248.

``Severe overvaluation at the end of August is correcting,'' wrote Bernstein, who doesn't provide a year-end estimate, on Nov. 4. ``Our models are still working their way back to fair value.''

The rate at which strategists are reducing their estimates is a sign equities are close to a nadir, some investors say.

``The U.S. is going to be the first market out of the bottom,'' Barton Biggs, a former Morgan Stanley strategist who now runs Traxis Partners LLC, a New York-based hedge fund, said on Bloomberg Television. ``We're at a major buying opportunity.''

Still, the 20 percent rally strategists predict must overcome a deteriorating economy as the fallout from the credit crisis spreads. The jobless rate rose to 6.5 percent in October from 6.1 percent the previous month.

``It's a stretch,'' said Leo Grohowski, the chief investment officer for the wealth management unit of Bank of New York Mellon Corp., which oversees $158 billion. ``The economic news definitely gets worse before it gets better.''

To contact the reporter on this story: Eric Martin in New York at emartin21@bloomberg.net; Elizabeth Campbell in New York at ecampbell11@bloomberg.net.




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