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Who’s right about the stock market: Bianco or Shiller?

Updated: September 29, 2011 12:51AM



D ear Mr. Berko: David Bianco, the brilliant analyst for Bank of America Merrill Lynch, is very bullish and thinks the market has lots of upside. But Robert Shiller of Yale and one of the most brilliant economists in the country tells us that the stock market is much too high. How can two equally brilliant professionals be so far apart in their opinions? — D.T., Troy, Minn.

Dear D.T.: Shiller, a Robert Redford look-alike down to the mole on his right cheek, is a highly regarded Ivy League economics professor. He also originated the Shiller Housing Index and is among the few who predicted the bursting of the stock-market bubble in 2000 and the collapse of the housing market in 2006. Shiller believes the market is overpriced by historical measures and bases his analysis on the value of the S&P 500 to its component companies’ earnings over the last 10, 20, 30 and 40 years. His data won’t predict when the S&P will decline; rather, they demonstrate that stocks are too expensive and that a market slowdown may be accelerating.

Bianco is an esteemed equity strategist who earned $4.6 million last year providing market strategy for Bank of America Merrill Lynch. Bianco is bullish on the market, believes stocks are cheap and that the S&P has significant upside potential. Bianco is a graduate of Wharton and prior to joining BAML was the equity strategist at UBS, Credit Suisse and Deutsche Bank. He believes Shiller’s conclusion is chock full of omissions.

If Bianco is right, the Dow Jones could rise to the 16,000 level. And I hope he is right. If Shiller is right, then the Dow could fall to the 8,000 level. I hope he’s wrong. Both men base their conclusions on corporate earnings and their average price-to-earnings ratios. I won’t debate their conclusions (both are basically very simple), but suffice it to say each defines “corporate earnings” differently — and that’s the rub. We know that the placement
of a comma can change
the meaning of a sentence, and by the same token,
the interpretation of a single word can change
the direction of the stock market. So the crux of the matter is whose interpretation of “corporate earnings” is correct.

This is the difference of opinions between the Ivory Towers of Yale and the Golden Towers of Wall Street. Some skeptics suggest that Bianco’s numbers are tainted due to his employment by BAML. They note that “sell” opinions issued by BAML in the last dozen years are as rare as Kryptonite. And certainly, in the last 12 years, a lot of selling advice has been warranted.

These skeptics note that the BAML investment committee nearly never permits an analyst to
recommend the sale of
a stock. Nor will they allow an analyst to tell investors the market is too high
or recommend accumulating cash.

Shiller, on the other hand, is an economist,
most of whom, if you’ve observed Alan Greenspan, have brains molded from used Ouija board parts. They smell of Old Spice, chew Juicy Fruit and
drive Volvos.

And knowledgeable observers ask: If economists are supposed to predict trends, how is it that most didn’t foresee the housing bubble, the banking crash, the mortgage debacle, the crash in interest rates, high oil prices, the recent recession, etc.?

These skeptics chuckle at Shiller’s comments and insist he’s out to butter his own nest. While Shiller predicted the housing bubbles, skeptics respond that even a blind squirrel can find an acorn once in a while.

However, Shiller doesn’t have an ax to grind, an investment committee to shade his opinions nor does he have a dog in the race. And this, D.T., is the long and short of it.

Address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or email him at mjberko@yahoo.com.



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